Public Corporations & Undertakings — Nature, Features & Classification — Administrative Law Notes

Public Corporations & Undertakings — Nature, Features & Classification

When you fly Air India, insure with LIC, or buy fuel from ONGC, you are dealing with the State running a business. These are not government departments in the ordinary sense — they are public corporations, separate legal persons the State creates to trade, serve and build, free from the red tape of a ministry but funded by public money. The law had to invent them because the welfare State became not just a regulator but an entrepreneur.

What is a public corporation?

A public corporation (public undertaking) is a body corporate created by a special statute of the legislature to carry on a commercial, industrial or service activity of the State, with its own legal personality distinct from the Government. It is the legal vehicle through which the State does business.

Why the State uses them: to combine public purpose and public funds with commercial flexibility — a corporation can act quickly, borrow, employ on its own terms and run like a business, which a department bound by government financial rules cannot.

Features of a public corporation — learn these for the essay:

Created by statute. It is born of a special Act, which defines its powers, functions and structure (e.g. LIC by the LIC Act, 1956).
Separate legal personality. It can sue and be sued, own property and contract in its own name — independent of the Government.
Own funds. It has its own finances, is not fed daily from the Consolidated Fund, and can retain and use its earnings.
Commercial autonomy. Freed from ordinary departmental and civil-service rules, it runs on business lines.
Employees are not civil servants. Its staff are its own employees, not Government servants (though it may be “State” for Part III — below).
Public accountability. Because it uses public money and power, it is subject to parliamentary, governmental and judicial control (Topic 2).

Classification of public undertakings — the three forms the State’s business takes:

Departmental undertaking — run directly as a department of Government (e.g. Railways, Posts). Least autonomy; fully under a ministry; funds from the Consolidated Fund.
Statutory/public corporation — created by a special Act with its own legal personality (LIC, ONGC, FCI). Medium autonomy; the classic “public corporation”.
Government company — a company registered under the Companies Act in which the Government holds not less than 51% of the paid-up share capital (s.2(45), Companies Act, 2013). Most flexible; run like a private company but State-owned (e.g. BHEL, SAIL).

A. Liability and the “State” question

A public corporation, having its own personality, is liable in tort and contract like a private company — it can be sued in its own name. The larger question is whether it is “the State” under Article 12, so that fundamental rights bind it and writs lie against it. Courts apply the “instrumentality or agency of the State” test — deep financial control, functional and administrative control, a monopoly status, or performance of a public function — R.D. Shetty v International Airport Authority (1979); Ajay Hasia v Khalid Mujib (1981); Pradeep Kumar Biswas v IISc (2002). If it passes the test, it is “State”, bound by Part III and answerable by writ.

On instrumentality (Ajay Hasia v Khalid Mujib, 1981): “Where a corporation is an instrumentality or agency of the Government, it must be held to be an authority within the meaning of Article 12 and hence subject to the same constitutional limitations as the Government itself.”

In Simple Terms: A public corporation is a body created by a special statute to run a State business, with its own legal personality, own funds and commercial freedom, whose staff are not civil servants. It comes in three forms — departmental undertaking, statutory corporation, and government company. It is liable like a private company, and if it is an instrumentality of the State (the Ajay Hasia test) it is also “State” under Article 12, so fundamental rights bind it and writs lie against it.

flowchart TD
    ROOT["State in business:<br/>public undertakings"]:::root
    ROOT --> D["Departmental undertaking<br/>(Railways, Posts) — least autonomy"]:::leaf
    ROOT --> S["Statutory / public corporation<br/>(LIC, ONGC) — own statute & personality"]:::leaf
    ROOT --> G["Government company<br/>(51%+ Govt shares, Companies Act) — most flexible"]:::leaf
    ROOT --> A["'State' under Art. 12?<br/>instrumentality test (R.D. Shetty, Ajay Hasia)"]:::mid
    classDef root fill:#FFF8DC,stroke:#000,stroke-width:1px,color:#000;
    classDef leaf fill:#E6F3FF,stroke:#1E3A8A,color:#000;
    classDef mid fill:#FDECC8,stroke:#8a5a00,color:#000;
    linkStyle default stroke:#888,stroke-width:1px;

🧩 WORKED EXAMPLE — Is the undertaking “State”?

Facts. A statutory corporation, wholly funded and controlled by the Government and holding a monopoly over a public service, dismisses an employee arbitrarily. He seeks a writ, which the corporation resists, saying it is not “State”.

Rule. A body that is an instrumentality/agency of the State (deep financial, functional and administrative control; monopoly; public function) is “State” under Article 12 and amenable to the writ jurisdiction.

Apply. The corporation is wholly funded and controlled by the Government and enjoys a monopoly — it clearly satisfies the Ajay Hasia instrumentality test.

Conclusion. It is “State” under Article 12; fundamental rights bind it, and a writ lies against its arbitrary action. The employee’s petition is maintainable.

Case Laws

R.D. Shetty v International Airport Authority (1979) — laid down the instrumentality/agency test for “State” under Article 12.
Ajay Hasia v Khalid Mujib (1981) — a society/corporation that is an instrumentality of the State is “State”.
Sukhdev Singh v Bhagatram (1975) — statutory corporations (LIC, ONGC, IFC) are “State”; their regulations have the force of law.
Pradeep Kumar Biswas v Institute of Chemical Biology (2002) — refined the test: deep and pervasive State control is required.

📄 Full notes + Question Bank (₹199) — every topic in depth, model answers to all past KSLU questions, in one printable PDF. Get the bundle · 10 Solved Problems · All Administrative Law topics