A new state government, or an outgoing one, promises several incentives to industries, such as exemptions from commercial taxes, subsidies on electricity and land etc. However, when the budget does not add up, the government suffers memory loss and raises technicalities to deny the benefits. By then, the industries that trusted the official word might have already invested huge amounts. Then, it is a frantic hunt for them to save the project. The desperate ones reach the court and spend more money on weary litigation in the high courts and the Supreme Court.
This is a common phenomenon, and there is fat case law on this subject. Once again this month, the Supreme Court had to sort out the issues in the State of Bihar vs Kalyanpur Cements Ltd case. The public sector undertaking is said to be “one of the very few large-scale surviving industrial units in Bihar”. When its technology became outmoded, it set up a state-of-the-art process in 1994 with the assistance from the World Bank, Holder Bank of Switzerland and financial institutions in India. However, it was hit by recession in the cement industry and government silence on a promise to grant sales tax exemption for five years. The unit had depended upon the government assurance while drawing up recovery plans. But the government reneged on its promise, leading to debilitating litigation.
The promise was made under the 1995 industrial policy. But the government prevaricated on issuing a notification to implement the policy. In fact, the chief minister presided over a meeting of the ministries concerned in 2001 and decided not to issue the notification to grant the benefit to sick units. The reason was that the policy had expired. The company argued that it had been waiting for a notification all along and the government deliberately withheld the issuance of the relevant notification.
The Patna High Court and the Supreme Court severely criticised the state government for its attitude. They ordered the government to keep its word. The Supreme Court said: “The government cannot be permitted to rely on its own lapses in implementing its policy to defeat the just and valid claim of the company. The state cannot be permitted to take advantage of its own wrong.” Referring to the argument that the policy had lapsed, it said that accepting such excuse would be “to put a premium on and accord a justification to the wholly arbitrary action of the government in not issuing the notification in accordance with the industrial policy.” The court also caught the state government lying on certain factual points.
The courts have laid down the principle of “promissory estoppel” to save those who depend on the government’s word and invest in business. In the Kasinka Trading vs Union of India (1995) case, the Supreme Court explained the doctrine. In short, if a party makes a promise to another by word or conduct, and the other party acts upon that, the first party is bound by the promise and it cannot go back on it.
The present case of Kalyanpur Cements is significant in the sense that the Supreme Court has reviewed the case law in view of the recurrence of this problem, and elicited the main elements of the doctrine of promissory estoppel. It must be established that a party made an unequivocal promise to the other party; the representation by word or conduct was intended to create legal relations to arise in future; a clear foundation has to be laid in the petition, with supporting documents; it has to be shown that the party invoking the doctrine has altered its position relying on the promise; and it would be permissible for the government to resile from the promise if public interest was to be hurt.
Though these norms are not quite new to those in the legal field, they have to be reiterated by the courts as promises, made as necessity of the past, are broken by governments as the necessity of the present. Breaking promise is as serious as not repaying a debt, and disastrous when business confidence is concerned. It would deter even the shrewdest business persons from investing in new regions or technologies. Whether setting up a new unit or upgrading an existing one, the government should keep its word if it wants to attract new ventures. If they are forced to persuade or pressurise the ministers by various means, and then move the courts ultimately, resources are wasted on all fronts.
The present case is really one such bleak case: The only large-scale undertaking in a failed state had to diffuse energy for nearly 15 years, waiting at the doors of the ministers and the bureaucracy to get what was promised. This, even when it had solid support from reputed financial institutions and a convincing recovery plan.