IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE K.K.DENESAN FRIDAY, THE 13TH APRIL 2007 / 23RD CHAITHRA 1929 WP(C).No. 3007 of 2006(G) -------------------------------------- PETITIONERS: ---------------------- 1. KERALA FINANCIAL CORPORATION OFFICERS ASSOCIATION, KERALA FINANCIAL CORPORATION, VELLAYAMBALAM, THIRUVANANTHAPURAM-33, REPRESENTED BY ITS SECRETARY, J.FRANCIS, DEPUTY MANAGER, KERALA FINANCIAL CORPORATION, VELLAYAMBALAM, THIRUVANANTHAPURAM. 2. KERALA FINANCIAL CORPORATION EMPLOYEES ASSOCIATION, KERALA FINANCIAL CORPORATION, VELLAYAMBALAM, THIRUVANANTHAPURAM-33, REPRESENTED BY ITS SECRETARY, M.RADHAKRISHNAN NAIR, JUNIOR EXECUTIVE, KERALA FINANCIAL CORPORATION, VELLAYAMBALAM, THIRUVANANTHAPURAM. BY ADV. SRI.P.G.PARAMESWARA PANICKER (SR.) SMT.JAYASREE MANOJ SRI.M.RISHIKESH SHENOY SRI.P.GOPAL RESPONDENTS: ------------------------- 1. KERALA FINANCIAL CORPORATION, VELLAYAMBALAM, THIRUVANANTHAPURAM-33, REPRESENTED BY ITS MANAGING DIRECTOR. 2. STATE OF KERALA, REPRRESENTED BY THE PRINCIPAL SECRETARY (FINANCE), SECRETARIAT, THIRUVANANTHAPURAM. BY ADV. SRI.U.K.RAMAKRISHNAN, SC, KFC for R1 BY GOVERNMENT PLEADER SRI. M.P.PRAKASH for R2 THIS WRIT PETITION (CIVIL) HAVING BEEN FINALLY HEARD ON 30/03/2007, THE COURT ON 13/04/2007 DELIVERED THE FOLLOWING: WPC.NO.3007/2006 G APPENDIX PETITIONER'S EXHIBITS: EXT.P1: COPY OF CHARTER OF DEMAND DTD. 30/06/2001 SUBMITTED BY THE 1ST PETITIONER BEFORE THE 2ND RESPONDENT. EXT.P2: COPY OF THE LETTER DTD. 22/01/2004 OF THE 1ST PETITIONER TO THE 1ST RESPONDENT. EXT.P3: COPY OF LETTER DTD.11/10/2004 OF THE 1ST RESPONDENT TO THE 2ND RESPONDENT. EXT.P4: COPY OF THE MINUTES OF THE DISCUSSION BY THE SUB COMMITTEE WITH THE REPRESENTATIVES OF THE SERVICE ORGANISATIONS HELD ON 04/11/2004. EXT.P5: COPY OF THE MINUTES OF THE MEETING OF THE BOARD OF DIRECTORS OF THE KFC HELD ON 09/11/2004. EXT.P6: COPY OF THE LETTER DTD. 22/11/2004 OF THE 1ST RESPONDENT TO THE 2ND RESPONDENT. EXT.P7: COPY OF THE MINUTES OF THE DISCUSSION BY THE SUB COMMITTEE WITH THE REPRESENTATIVES OF THE SERVICE ORGANISATIONS HELD ON 02/12/2004. EXT.P8: COPY OF THE LETTER DTD. 06/12/2004 OF THE 2ND RESPONDENT TO THE 1ST RESPONDENT. EXT.P9: COPY OF THE LETTER DTD. 06/01/2005 OF THE 2ND RESPONDENT TO THE 1ST RESPONDENT. EXT.P10: COPY OF THE LETTER DTD. 18/03/2005 OF THE 1ST RESPONDENT TO THE 2ND RESPONDENT. EXT.P11: COPY OF THE LETTER DTD. 16/04/2005 OF THE PETITIONER TO THE 1ST RESPONDENT. EXT.P12: COPY OF THE LETTER DTD. 02/06/2005 OF THE 1ST RESPONDENT TO THE 2ND RESPONDENT. EXT.P13: COPY OF THE G.O. DTD. 12/01/2006. EXT.P14: COPY OF PROFIT AND LOSS ACCO;UNT OF THE 1ST RESPONDENT FOR THE YEAR ENDED 31/03/1999. ...2/- ....2.... WPC.NO.3007/2006 G EXT.P14(A): COPY OF PROFIT AND LOSS ACCOUNT OF THE 1ST RESPONDENT FOR THE YEAR ENDED 31/03/2000. EXT.P14(B): COPY OF PROFIT AND LOSS ACCOUNT OF THE 1ST RESPONDENT FOR THE YEAR ENDED 31/03/2001. EXT.P14(C): COPY OF PROFIT AND LOSS ACCOUNT OF THE 1ST RESPONDENT FOR THE YEAR ENDED 31/03/2002. EXT.P14(D): COPY OF PROFIT AND LOSS ACCOUNT OF THE 1ST RESPONDENT FOR THE YEAR ENDED 31/03/2003. EXT.P14(E): COPY OF PROFIT AND LOSS ACCOUNT OF THE 1ST RESPONDENT FOR THE YEAR ENDED 31/03/2004. EXT.P14(F): COPY OF PROFIT AND LOSS ACCOUNT OF THE 1ST RESPONDENT FOR THE YEAR ENDED 31/03/2005. EXT.P15: COPY OF STATEMENT SHOWING THE OPERATING PROFIT OF THE 1ST RESPONDENT FOR THE YEARS 98-99 TO 04-05. EXT.P16: COPY OF THE STATEMENT SHOWING THE EXPENSES INCURRED FOR THE EMPLOYEES BY THE 1ST RESPONDENT FOR THE YEARS 98-99 TO 04-05. 2ND RESPONDENT'S EXHIBITS: EXT.R2(A): COPY OF THE RELEVANT PORTION OF THE PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31/03/2002 PERTAINING TO KERALA FINANCIAL CORPORATION. EXT.R2(B): COPY OF THE CIRCULAR NO.9894/BPE 2/03/PLG.DTD. 2/03/2005. EXT.R2(C): COPY OF THE CIRCULAR DTD. 29/03/2004. EXT.R2(D): COPY OF THE G.O.(MS) 1972/99/FIN. DTD. 04/10/1999 IMPLEMENTING THE PREVIOUS PAY REVISION WITH EFFECT FROM 01/07/1996. EXT.R2(E): COPY OF THE GOVERNMENT ORDER DTD. 14/10/1999. EXT.R2(F): COPY OF THE GOVERNMENT ORDER DTD. 24/10/1994. EXT.R2(G): COPY OF THE GOVERNMENT ORDER DTD. 15/07/1995. EXT.R2(H): COPY OF THE LETTER DTD. 06/12/2004. EXT.R2(I): COPY OF THE LETTER DTD. 01/01/2005. /TRUE COPY/ KSS WP(C).No.3007 of 2006-G. -1- K.K.DENESAN, J. ========================== W.P.(C).No.3007 OF 2006-G. ========================== Dated this the 13th day of April, 2007. J U D G M E N T The Kerala Financial Corporation (hereinafter referred to as the 'KFC') is a statutory corporation constituted as per the provisions of the State Financial Corporations Act, 1951, (for short, 'the Act'). The KFC is a State as defined in Article 12 of the Constitution of India. 2. The first respondent is an Association of the Officers of the KFC and the second petitioner is an Association of the employees of the KFC. The petitioners are registered Unions under the Trade Unions Act, 1926 and are recognised by the KFC. It is contended that the petitioners represent a major section of the officers and the employees of the KFC. 3. Salary and other monetary benefits payable to the officers and the employees of the KFC have been WP(C).No.3007 of 2006-G. -2- subjected to revision every five years by issuing separate orders in that behalf. The revision of pay is effected through the settlement arrived at between the Management and Service Organisations of the KFC through bilateral agreements. Recognised service organisations and the management of the KFC are the parties to the settlement. 4. The period for which agreement was entered into as stated above introducing the last pay revision in the KFC expired on 30-6-2001. The revision was for the period from 1-7-1996 to 30-6-2001. On the expiry of the above period, the first petitioner submitted Ext.P1 charter of demands on 30-6-2001. The first respondent - KFC did not take any action on Ext.P1. Taking into consideration the delay caused in holding negotiations for arriving at a settlement, the first petitioner requested the KFC as per Ext.P2 to grant interim relief @ 40% of the basic pay plus DA to the employees and the officers, pending finalisation of the pay revision. The first respondent sent Ext.P3 letter dated 11-10-2004 to the second respondent-Government of WP(C).No.3007 of 2006-G. -3- Kerala requesting for permission to start negotiations and to sign fresh long term agreement with the service organisations on revision of pay and allowances. Simultaneously as per decision taken in the Board meeting of the first respondent held on 29-9-2004, a subcommittee was constituted for the special purpose of holding negotiations with the service organisations and for submitting its recommendations regarding the proposed new pay revision settlement. The subcommittee so constituted held three meetings. The first discussion with the service organisations took place on 4-11-2004. As a result of the above discussion a consensus was arrived at with regard to the rate of interim relief to be granted to the employees. The rate of interim relief thus arrived at is 20% of basic pay with effect from 1-7-2001. The subcommittee placed the above recommendation for the consideration of the first respondent KFC. Ext.P4 is the copy of the minutes of the discussion held on 4-11-2004 by the subcommittee with the representatives of the service organisations. WP(C).No.3007 of 2006-G. -4- 5. In the Board meeting of the subcommittee held on 9-11-2004 it was decided to sanction interim relief to the employees and officers of the KFC subject to approval by the Government at the rates shown below:- From 1-7-2001 to 30-6-2003 - @ 10% of the basic pay. From 1-7-2003 onwards till finalisation of the settlement - @ 20% of the basic pay. Ext.P5 is the minutes of the Board meeting held on 9- 11-2004. 6. In accordance with the above decision of the KFC, Ext.P6 letter dated 22-11-2004 was sent to the second respondent requesting to accord sanction for payment of interim relief @ 10% of the basic pay with effect from 1-7-2001 to 30-6-2003 and @ 20% of the basic pay from 1-7-2003 onwards to the employees of the KFC till the finalisation of the new wage settlement. 7. The subcommittee again held meeting with the representatives of the service organisations on 2-12- 2004. Consensus was reached between the management and the service organisations with regard to the various allowances payable to the employees. This fact is WP(C).No.3007 of 2006-G. -5- evident from Ext.P7 minutes of the discussion by the subcommittee held on 2-12-2004. 8. In response to Ext.P3 letter of the KFC requesting for permission to start negotiations with the service organisations regarding pay revision, Government as per Ext.P8 letter dated 6-12-2004 stated that in view of various Government orders issued earlier, wage revision cannot be allowed in loss making Public Sector Undertakings and since KFC has been incurring loss for the last few years, Government cannot accede to the demand of the KFC for wage revision. Ext.P8 letter, however, did not mention anything regarding the permission for granting interim relief, pending finalisation of the new wage revision settlement. Subsequently, the Government as per Ext.P9 letter dated 6-1-2005 informed the KFC that Public Sector Undertakings which are not entitled to claim wage revision are not entitled to claim interim relief also. 9. The first respondent could not agree with the view expressed by the second respondent Government that WP(C).No.3007 of 2006-G. -6- the Corporation has been running at a loss. Hence Ext.P10 letter dated 18-3-2005 was sent by the Chairman of KFC to the Principal Secretary, (Finance), Government of Kerala. After narrating the facts and circumstances which led to the holding of discussions with the service organisations and the taking of decisions seeking the permission of the Government for early settlement of wage revision and interim relief, Ext.P10 concludes as follows:- “In this connection we would like to submit the following facts for kind consideration Operating results of the Corporation for the last three years are furnished below:- (Rs. in lakhs) YEAR Sanction Disbursement Operating profit 2001-2002 16382 17594 105 2002-03 15573 11231 115 2003-04 16958 11902 953 It may be seen from the above that the performance of the Corporation has been fairly good resulting in profits. The loss as reported to have been made is only due to provision for NPA which is not a cash loss. The Corporation's financial position is sound enough to meet the additional commitment of Rs.220.11 lakhs (upto February, 2005) on WP(C).No.3007 of 2006-G. -7- account of payment of interim relief sanctioned by the Board. In this connection it may also be noted that KFC is one among the top 3 SFCs in India as per evaluation study conducted by SIDBI. In these circumstances, it is requested that Government may kindly accord sanction for payment of interim relief as decided by the Board and also give permission for negotiations with the Employees Organisations for revision of pay and allowances.” 10. Pending consideration of Ext.P10 by the Government, the first petitioner submitted Ext.P11 representation dated 16-4-2005 before the Board of Directors of KFC contending that the power of the Government to interfere with the affairs of KFC operates only in a limited sphere and matters relating to wage revision as also interim relief to the employees are outside the jurisdiction of the Government. The first petitioner, therefore, requested the KFC to hold bilateral discussions to revise the pay and to grant the interim relief, without waiting for permission from the Government. It appears that the first respondent sent Ext.P12 letter dated 2-6-2005 to the 2nd respondent requesting to review the stand taken WP(C).No.3007 of 2006-G. -8- by the Government and to accord sanction for the payment of interim relief and to start negotiations for revision of pay and allowances. In reply to Ext.P12, Government sent Ext.P13 letter dated 12-1-2006 to the first respondent. Paragraph 2 of Ext.P13 reads:- “2. Government, after examining the matter in detail are pleased to issue the following orders. i) Kerala Financial Corporation is permitted to start negotiation with service organisations in the matter of revision of pay and allowances of the employees of Kerala Financial Corporation. They shall enter into bilateral agreement only with the prior approval of the Government. ii) The percentage of increase in the pay and allowances, date of effect on revision etc. shall be referred to the Public Enterprises Board based on whose guidance, the negotiations shall commence. iii) The Kerala Financial Corporation is permitted to sanction Interim Relief @ Rs.300/- p.m. to the employees w.e.f. 1.1.2006. This will be adjusted against pay revision arrears.” 11. The petitioners feel aggrieved by the stand taken by the respondents to the extend the Government insists its permission for starting negotiations and for finalising the wage revision settlement and the WP(C).No.3007 of 2006-G. -9- grant of interim relief to the employees and the officers of the KFC. The petitioners have prayed for the issue of a writ of mandamus directing the first respondent to release the interim relief as decided by the KFC on 9-11-2004, and for a further direction to the first respondent to proceed with the negotiations and finalise the new pay revision settlement for the period 1-7-2001 to 30-6-2006 and implement the decisions arrived at without seeking the approval of the State Government. The petitioners have sought for a declaration that the State Government has no authority to interfere or to issue directions on matters relating to the service conditions including revision of pay and allowances of the employees and the officers of KFC. 12. In support of the declaration thus sought for, namely, that the Government has no authority to interfere or to issue directions on matters relating to the service conditions including revision of pay and allowances of the employees and the officers of KFC, emphasis is sought to be placed on the fact that the WP(C).No.3007 of 2006-G. -10- KFC is an autonomous body and the contention that the power of the State Government is limited to issuance of instructions touching the essential and primary functions of the KFC and not on any matter outside the aforesaid functions. It is contended that revision of pay is not a matter of policy and does not fall within the purview of essential and primary functions of the KFC. 13. The first respondent-KFC has filed a counter- affidavit. The sequence of events stated by the petitioners in the writ petition have been more or less admitted by the first respondent in the counter- affidavit. It is, however, stated, among other, that as per the practice followed by the KFC, it was necessary to approach the Government of Kerala to sanction and release the interim relief. According to the first respondent, its financial performance for the financial years 2001-02 and 2002-03 were on operating profit (but were on net loss) and was on net profit for the year 2003-04. It is contended that as per Section 39(1) of the State Financial Corporations Act 1951, WP(C).No.3007 of 2006-G. -11- the KFC Board shall be guided, in the discharge of its functions, by such instructions on question of policy as may be given to it by the State Government in consultation with and after obtaining the advice of the Small Industries Development Bank of India. Towards the end of the counter-affidavit the Managing Director of the first respondent has stated that the performance of the KFC was on operating profit from 1999 to 2005, but were on net loss during 1999-2000, 2000-01, 2001- 02, 2002-03 and 2004-05. It is also averred that during the years 1998-99 and 2003-04, the KFC earned a net profit of Rs.243 lakhs and Rs.181 lakhs respectively. The counter-affidavit says that the State Government is not providing any grant to the first respondent Corporation. But the share capital holding of the Government is 90.41% as on 31-3-2005. As per the audited accounts for the financial year ended on 31-3-2005 the percentage of employee expenses compared to total income, is 10.05%. 14. In the counter-affidavit filed on behalf of the second respondent-Government averments have been WP(C).No.3007 of 2006-G. -12- made with supporting materials to contend for the position that the Government have got a say in the matter and the first respondent shall not act in defiance of the instructions given by the Government. Reliance is sought to be placed on the role played by the Government under Section 39(1) of the State Financial Corporation Act, as also the authority it can exercise being the major share holder. According to the second respondent, the financial capacity of the first respondent is not sound as to enter into a new settlement with its employees and officers for revision of pay and allowances. The petitioners have filed a reply-affidavit to controvert facts and contentions pleaded by the respondents to the extend they are directed against the grounds urged by the petitioners. 15. I have heard at length Shri.P.G.Parameswara Panicker, learned counsel for the petitioners, Shri.U.K.Ramakrishnan, learned counsel for the first respondent and Shri.M.P.Prakash, learned Special Government Pleader for the second respondent. 16. The KFC is a statutory autonomous body WP(C).No.3007 of 2006-G. -13- constituted under Section 3 of the Act which came into force in 1951. It was enacted to provide for the establishment of State Financial Corporations to create institutional frame work for financing media and small scale industries. It is managed as provided in Section 9 of the Act by a Board consisting of the majority of Directors nominated by the State Government, the Reserve Bank and the Small Industries Bank vide Section 10 of the Act. The State Financial Corporations constituted under the Act stand as regional representative institutions to work out the diversification in the financial system, required to cater industrial enterprises. After its coming into force in 1951, it has undergone amendments in 1956, 1962, 1972, 1975, 1985 and 2000. The Act was comprehensively amended in 2000 to enable the State Financial Corporations to equip themselves to the emerging business environment on the introduction of economic reforms and to strengthen their share holder base and to provide them with greater financial autonomy and operational flexibility (emphasis WP(C).No.3007 of 2006-G. -14- supplied). The main features of the amendment include autonomy to the State Financial Corporations with regard to the investment of funds, vesting more power in the general body of share holders and empowering the State Government to issue guidelines on questions of policy to the State Financial Corporations provided the Government holds not less than 51% of the issued equity share capital. In other cases, the role of the State Government is only to advice the State Financial Corporations on matters of policy. In the year 1990, the Small Industrial Development Bank of India (SIDBI) was established under the Small Industries Development Bank of India Act, 1989. 17. Section 23 of the Act confers power on the first respondent to appoint such officers, advisers and other employees as it considers necessary for the efficient performance of its functions and determine, by regulations, their conditions of appointment and service and remuneration payable to them. The conditions of appointment and the remuneration payable to the officers, the advisers and the employees shall WP(C).No.3007 of 2006-G. -15- be determined by the first respondent by regulations made under Section 48 of the Act. Sub Section (1) of Section 48 of the Act reads:- “48. Power of Board to make regulations:- (1) The Board may, after consultation with the Small Industries Bank and with the previous sanction of the State Government, make regulations not inconsistent with this Act and the rules made thereunder to provide for all matters for which provision is necessary or expedient for the purpose of giving effect to the provisions of this Act.” 18. In exercise of the power to make regulations, the first respondent has framed the Kerala Financial Corporations Staff Regulation, 1966 (hereinafter referred to as 'the Regulations'). with the previous sanction of the second respondent-Government. The Regulations apply to all whole time employees of the first respondent. Under regulation 8(i) of the Regulations the permanent staff of the first respondent shall have to be grouped as Class A - Senior Officers, Class B - Middle level officers, Class C - Assistants, Clerical staff, Stenographers and Typists and Class D - Subordinate staff. Regulation 8(ii) of the Regulations reads:- WP(C).No.3007 of 2006-G. -16- “The Board shall fix from time to time the number of posts in all categories and the pay scales of the officers and other employees. The present pay scales are shown in the Appendix.” The Appendix consists of the nomenclature of the various posts starting from the post of Sweeper to that of General Manager, printed on the left side and the scales of pay of the respective posts printed on the right side. The learned counsel for the petitioners made a forceful endeavor to project the case of the petitioners that revision of pay scales is a matter between the management and the members of the staff of the first respondent Corporation and that the second respondent Government has no say in such matters. 19. Learned Government Pleader as also the learned counsel for the first respondent submitted that the scheme of the Act would unmistakeably show that the State Government has got an all pervasive control over the management and the administration of KFC. Section 4 deals with the share capital and share holders. Section 4(1) says that the authorised capital of the Financial Corporation shall be such sum as may be fixed WP(C).No.3007 of 2006-G. -17- by the State Government in that behalf etc. Section 4 (3) says that subject to the approval of the State Government and the Small Industries Bank, the Board shall determine the number of shares which may, respectively be distributed among (a) the State Government; (b) the Small Industries Bank; (c) Public Sector Banks, the LIC of India, etc; and (d) parties other than those referred to in Clauses (a), (b) or © provided that the number of shares which can be allotted to the parties referred to in Clause (d) shall in no case exceed 49% of the total number of issued equity shares. The power to specify the issue of special class of shares, in consultation with the Small Industries Bank, is also vested in the State Government vide Section 4A of the Act. Under Sec.7 of the Act, it is open to the State Government to guarantee the bonds and debentures issued by the Financial Corporation as to the repayment of principal and the payment of interest at such rate as may be fixed by the State Government. Sec.8 of the Act provides that the Financial Corporation may accept from the State WP(C).No.3007 of 2006-G. -18- Government deposits repayable on such terms as the Board thinks fit. The State Government has got the right to nominate two Directors in the Board of Directors constituted under Sec.10 of the Act. The power to appoint and remove the Managing Director is that of the State Government (see Sec.17 of the Act). Under Sec.25 of the Act, but subject to other provisions of the Act, the KFC is free to act as the agent of the Central Government, State Government, etc. The State Government has got the power to instruct KFC on questions of policy. KFC, though authorised to make regulations, cannot do so without the previous sanction of the State Government. It is so provided in Sec.48 of the Act. Based on the above provisions of law, learned Special Government Pleader submitted that the first respondent cannot take decisions involving financial implications without the junction of the Government. It is submitted that the Government have vital interest in the entire affairs of the first respondent. 20. Though the interest of the Government in the WP(C).No.3007 of 2006-G. -19- affairs of the KFC cannot be denied, I am of the opinion that the power of the Government to issue binding instructions in matters relating to pay, allowances etc. of the employees, Sections 23, 39 and 48 of the Act have got a direct bearing on the issue and that, much will depend on the application of those provisions to the fact situation herein. Of course, the powers of respondents 1 and 2 to do certain things are traceable to the above provisions; but the limitations placed on the said respondents in exercising such powers, on a true construction of the provisions, are also equally important. 21. The second respondent seeks to substantiate its stand that it has got a say in the matter of revision of pay scales, mainly on the basis of three contentions. 22. The first among those contentions is founded on Section 39 of the