REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NOS.  3457-3458             OF 2009 (Arising out of SLP (C) Nos. 14217-14218 of 2007)

GLOBAL ENERGY LTD. & ANR.     … APPELLANTS

Versus

CENTRAL ELECTRICITY REGULATORY  COMMISSION              … RESPONDENT

J U D G M E N T

S.B. Sinha, J.

1. Leave granted.

INTRODUCTION

2. Constitutional validity of clauses (b) and (f) of Regulation 6A of the  

Central  Electricity  Regulatory  Commission  (Procedure,  Terms  and  

Conditions  for  Grant  of  Trading  License  and  other  related  matters)  

(Amendment),  Regulation 2006 (hereinafter referred to and called for the  

sake of brevity as “Amended Regulation”) is the question involved herein.  

BACKGROUND FACTS  

3. It arises in the following factual matrix.

The Parliament enacted Electricity Act, 2003 (hereinafter referred to  

as, “the said Act”).  In exercise of its jurisdiction conferred by Section 178  

of the said Act, the Central Electricity Regulatory Commission (for short,  

“CERC”)  made  Central  Electricity  Regulatory  Commission  (Procedure,  

Terms  and  Conditions  for  Grant  of  Trading  License  and  other  related  

matters), Regulation 2004 (for short, “the Regulation”)

Indisputably,  in terms of the provisions of the said Act as also the  

Regulations, inter alia, license is required to be taken by a person who is  

desirous of dealing in inter-state trading, which in terms of Regulation 2(g)  

means “transfer of electricity from the territory of one State to the territory  

of another State by an electricity dealer”.

4. Appellant  No.  1  is  a  Public  Limited  Company  incorporated  and  

registered under the Indian Companies Act.  

5. Pursuant to or in furtherance of the said Act and the Regulations, the  

appellant No. 1 herein filed an application for grant of inter-State Trading  

License under Category ‘A’ before CERC on 23.3.2004. CERC published a  

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notice as regards the said application filed by the appellant No. 1 for grant of  

inter-state  Trading  License  in  all  editions  of  ‘Indian  Express’,  Financial  

Express’ and a vernacular daily ‘Jansatta’.  Appellant No. 1 also filed an  

interlocutory  application  seeking  permission  to  trade  in  the  electricity  

pending final disposal of its petition for grant of inter-state trading license as  

it  had  been  engaged  in  inter-state  trading  of  electricity  prior  to  the  

commencement of the said Act.  By reason of an order dated 31.3.2004, the  

said  application  was  allowed.   Objections  filed  to  the  appellant  No.1’s  

application for grant of license pursuant to the aforementioned notice were  

also rejected by an order dated 30.6.2004.   

6. On or about 6.9.2004, CERC directed as under:

“(i) The petitioner  No. 1  was qualified for  the  grant of Category ‘A’ license for inter-state trading  in electricity for trading up to 100 million units in  a year.  

(ii) The CERC proposed to issue the license for  inter-state  trading  to  the  petitioner  No.  1  as  category ‘A’ trader.

(iii) The petitioner No. 1 was directed to publish  a notice under Section 15(5) of the Act.  Section  15(5) of the Act reads as follows:

’15. Procedure for grant of licence. ………..

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(5) Before  granting  a  licence  under  section  14,  the  Appropriate  Commission  shall-  

(a) publish a notice in two such daily  newspapers,  as that  Commission  may  consider  necessary,  stating  the  name  and address of the person to whom it proposes to issue  the licence;

(b) consider  all  suggestions  or  objections  and  the  recommendations,  if  any,  of  the  Central  Transmission  Utility or the State Transmission Utility, as the case may  be.”

7. After  the  publication  of  notices,  objections  were  also  received  as  

regards appellant No. 1’s trading in inter-state supply of electrical energy  

pursuant to the aforementioned interim order.  The matter was taken to High  

Court and interim license granted to appellant No. 1 was extended by the  

High Court from time to time.   

Draft  Regulations  were  published  to  which  appellant  No.  1  filed  

objection.   The Amended Regulations were notified on 3.4.2006.  By an  

order dated 20.8.2006, CERC rejected the application filed by the appellant  

No.  1  for  grant  of  inter-state  trading  license  opining that  Regulation  6A  

brought in through the amended Regulation will have a retrospective effect.  

An appeal preferred thereagainst is pending before the Appellate Tribunal  

for Electricity.   

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8. Appellants filed Writ Petitions before the High Court questioning the  

validity of the said Regulation.  By reason of the impugned judgment the  

said Writ Petitions have been dismissed.   

CONTENTIONS

9. Mr. Dipankar Gupta, the learned Senior Counsel appearing on behalf  

of the appellants, inter alia, would submit :-

i. Having regard to the objects and reasons for which the said Act  

was enacted, the High Court must be held to have committed a  

serious error insofar as it  held that the Amended Regulations  

would apply to the appellant No. 1’s application.   

ii. It was also contended that sufficient guidelines having been laid  

down as regards disqualification of persons applying for grant  

of licence, the impugned Regulations must be held to be ultra  

vires Article 14 of the Constitution of India.   

iii. In any event, keeping in view the facts and circumstances of  

this case, the provisions should be read down.   

10. Mr. Parag Tripathi, learned Additional Solicitor General appearing on  

behalf of the respondent, would, however, support the impugned judgment.  

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THE ACT   

11. The  said  Act  was  enacted  to  consolidate  the  laws  relating  to  

generation,  transmission,  distribution,  trading  and  use  of  electricity  and  

generally  for  taking  measures  conducive  to  development  of  electricity  

industry,  promoting  competition  therein,  protecting  interest  of  consumers  

and  supply  of  electricity  to  all  areas,  rationalization  of  electricity  tariff,  

ensuring transparent policies regarding subsidies, promotion of efficient and  

environmentally  benign  policies,  constitution  of  Central  Electricity  

Authority,  Regulatory  Commissions  and  establishment  of  Appellate  

Tribunal and for matters connected therewith or incidental thereto.

12. Indisputably, one of the objects and reasons for enacting the said Act  

was to encourage private sector’s participation in generation, transmission  

and distribution of electrical energy.  Trading is considered to be a distinct  

activity.  Preamble of the Act also refers to distribution and trading as one of  

the objects sought to be achieved by reason of the said Act.  

13. Section 2(71)  defines  “trading” to mean purchase  of  electricity  for  

resale thereof and the expression “trade” is construed accordingly.  Part IV  

of the Act providing for licensing, inter alia, mandates that no person shall  

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undertake trading in electricity unless he is authorized to do so by a licence  

issued under Section 14, or is exempt under Section 13.  

Section 14 of the Act, inter alia, provides for grant of licence to any  

person inter alia trading in electricity as an electricity trader.   

Section 15 provides for the detailed procedures for grant of licence as  

also the exercises required to be undertaken by the appropriate commission  

therefor.  Section 16 of the Act empowers the Appropriate Commission to  

lay down conditions for grant of licence, which is as under:

“16.  Conditions  of  licence.  –  The  Appropriate  Commission may specify any general or specific  conditions which shall apply either to a licensee or  class  of  licensees  and  such  conditions  shall  be  deemed to be conditions of such licence:

Provided that  the Appropriate  Commission  shall,  within  one  year  from  the  appointed  date,  specify  any  general  or  specific  conditions  of  licence applicable to the licensees referred to in the  first,  second,  third,  fourth  and  fifth  provisos  to  section 14 after  the expiry of one year  from the  commencement of this Act.”

Section  17  imposes  certain  restrictions  on  activities  of  licensing.  

Section 18 empowers the appropriate commission to amend the terms of an  

existing  licence  in  public  interest.   This  power  can  be  exercised  by  the  

appropriate commission either on an application made in this connection by  

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the licensee or suo motu.  Section 19 lists the grounds for revocation of a  

licence.

Section  52  lays  down  the  provisions  with  respect  to  eligibility  of  

electricity  trader  for grant  of  licence.   The said section provides  that  the  

Commission  may  specify  the  technical  requirement,  capital  adequacy  

requirement and creditworthiness for being an electricity trader.  

Section  66  mandates  that  the  Appropriate  Commission  shall  

endeavour to promote the development of a market (including trading) in  

power  in  such  manner  as  may  be  specified  and  shall  be  guided  by  the  

National Electricity Policy referred to in Section 3 of the Act.    

Section  76  provides  for  constitution  of  a  Central  Commission.  

Functions of the Central Commission are laid down in Section 79 thereof;  

clauses (e) and (j) of Sub-Section (1) whereof reads as under:

“(e) to  issue  licenses  to  persons  to  function  as  transmission  licensee  and  electricity  trader  with  respect to their inter-State operations;

xxx xxx xxx

(j) to fix the trading margin  in the inter-State  trading of electricity, if considered, necessary.

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Section 178 of the Act provides for a regulations making power.  Sub-

Section  (1)  thereof  empowers  the  Commission  to  make  regulations  

consistent with the Act and the rules generally to carry out the provisions of  

the  Act.   Sub-Section  (2)  of  Section 178,  inter  alia,  prescribes  that  such  

regulations may provide, inter alia, for (a) period to be specified under the  

first proviso to Section 14; (b) the form and the manner of the application  

under sub-section (1) of Section 15; and (c) the manner and particulars of  

notice under sub-section (2) of section 15.   

THE REGULATION  

14. Sub-Regulation  (4)  of  Regulation  2  applies  to  trading  carried  out  

bilaterally  between the  generating company,  including  captive  generating  

plant, distribution licensee and the electricity trader on the one hand and the  

electricity  trader  and  the  distribution  licensee  on  the  other.  Supply  to  

consumers is, thus, not a general function.   

15. Chapter  II  of  the  Regulations  lay down the procedure  for  grant  of  

licence for inter-state trading.   

16. Chapter III lays down the requirements of being an electricity trader.  

The  title  of  Regulation  6  is  Capital  adequacy,  Requirement  and  

Creditworthiness, in terms whereof the net worth of the electricity trader at  

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the time of application is required to be not less than the amounts specified  

thereunder.  Chapter IV provides for the terms and conditions of the licence.  

Regulation 7 lays down the obligations of the licensee.  

AMENDMENT IN REGULATION

“5. Insertion  of  Regulation  6A: After  regulation  6  of  the  principal  regulations,  the  following shall be inserted, namely:-

“6A. Disqualifications: The applicant  shall  not  be  qualified  for  grant  of  licence for inter-state trading, if:

(a) …….. (b) The applicant, or any of his partners, or promoters,  

or Directors or Associates is involved in any legal  proceedings, and in the opinion of the Commission  grant  of  licence  in  the  circumstances,  may  adversely affect the interest of the electricity sector  or of the consumers; or  

(c) ……….  (d) ……….  (e) ………. (f) The applicant  is  not  considered  a  fit  and proper  

person for the grant of licence for any other reason  to be recorded in writing;

Explanation:   For  the  purpose  of  determining  as  to  whether  the  applicant is a ‘fit and proper person’,  the Commission may take account of  any  consideration,  as  it  deems  fit,  including  but  not  limited  to  the  following, namely:-

(i) financial integrity of the applicant.

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(ii) His competence; (iii) His reputation and character; and  (iv) His efficiency and honesty.”

INTERPRETATION

17. Regulation 6A has been inserted.  The said provision is imperative in  

character.   It  is  couched  in  negative  language.   It  provides  for  

disqualifications.  

Indisputably, a subordinate legislation should be read in the context of  

the  Act.   Thus read,  Regulation 6A should be construed in terms of  the  

requirements  contained  in  Section  52  of  the  Act,  namely,  technical  

requirement, capital adequacy, requirement and creditworthiness for being  

an electricity trader.  

It  affects  the  creditworthiness  of  the  applicant.   It  also  affects  the  

credit effectiveness, namely, (1) financial integrity of the applicant; (2) his  

competence;  (3)  his  reputation  and  character;  and  (4)  his  efficiency  and  

honesty.   

It affects a pending proceeding.  Because of the said amendment, an  

interim licence granted in favour of the appellant stood revoked.   

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This,  however,  would  not  mean  that  an  amendment  made  in  a  

regulation would under no circumstance, affect pending proceeding.

18. It is now a well settled principle of law that the rule making power  

“for carrying out the purpose of the Act” is a general delegation.  Such a  

general delegation may not be held to be laying down any guidelines.  Thus,  

by reason of such a provision alone, the regulation making power cannot be  

exercised so as to bring into existence substantive rights or obligations or  

disabilities which are not contemplated in terms of the provisions of the said  

Act.   

We may, in this connection refer to a decision of this Court in Kunj  

Behari  Lal  Butail  & Ors.  vs.  State  of  H.P.  & Ors. [(2000)  3  SCC 40],  

wherein a Three Judge Bench of this Court held as under :

“14. We are also of the opinion that a delegated  power to legislate  by making rules “for carrying  out the purposes of the Act” is a general delegation  without laying down any guidelines; it cannot be  so exercised as to bring into existence substantive  rights  or  obligations  or  disabilities  not  contemplated by the provisions of the Act itself.”

(See also State of Kerala & ors.  vs.  Unni & Anr.  (2007) 2 SCC 365  

(Paras 32 to 37),  A.P. Electricity Regulatory Commission  vs.  M/s R.V.K.  

Energy Pvt. Ltd. & anr.  (2008) 9 SCALE 529)

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19. The  power  of  the  regulation  making  authority,  thus,  must  be  

interpreted keeping in view the provisions of the Act.  The Act is silent as  

regards  conditions  for  grant  of  licence.   It  does  not  lay  down  any  pre-

qualification therefor.   Provisions for imposition of  general  conditions of  

licence or conditions laying down the prequalifications therefor and/or the  

conditions/qualifications  for grant  or  revocation of  licence,  in  absence of  

such  a  clear  provision  may  be  held  to  be  laying  down  guidelines  by  

necessary  implication  providing  for  conditions/qualifications  for  grant  of  

licence also.

20. Mr. Tripathi had relied on a decision of this Court in  The Rampur  

Distillery Co. Ltd. V. The Company Law Board & Anr. [(1969) 2 SCC 774].  

This Court therein was considering the validity of a provision laying down  

the concept of a ‘fit and proper person’ for the purposes of Section 326(2) of  

the Companies Act, 1956 by reason whereof the Central Government has  

been conferred power to refuse the approval of appointment of a Managing  

Director, if in its opinion, he was not a fit and proper person.  This Court  

held  that  the  satisfaction  contemplated  thereby  must  be  the  result  of  an  

objective appraisal of relevant material and subject to the judicial scrutiny.  

Stating that by reason thereof, the Central Government was not made the  

final arbiter of the existence of the ground on which the satisfaction may be  

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founded.   Such a power  was held to  be a  quasi  judicial  one and not  an  

administrative one, carrying with it a duty arising from the nature of the Act  

empowered to be done the job for which it is to be done, the conditions in  

which it is to be done and its repercussion upon the power of the company,  

the shareholders, the creditors and the general public for whose benefit, the  

power is to be exercised.  

This decision, therefore, itself may be considered to be an authority  

for the proposition that where the Parliament thought it  fit  and proper to  

confer such a power upon an authority exercising quasi judicial power, the  

same is specifically conferred by the provisions of the Act itself and not by a  

subordinate legislation.

Paragraph 19 of the said decision clearly shows that for the purpose of  

arriving at a satisfaction that a person was fit and proper to be re-appointed  

as managing agent, all past conduct and actings were required to be taken  

into consideration.  Regulation 6A is a disqualifying statute.  The statute,  

however, does not provide for any machinery to collect independent material  

for being placed before the proper authority as regards evaluation of credit  

effectiveness and creditworthiness of the applicant.   

CONSTITUTIONALITY ISSUE

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21. For deciding the question involved herein, we must notice the purport  

and  object  for  which  such  disqualifications  have  been  brought  into  the  

statute book.  In terms of Section 52 of the Act, the creditworthiness of the  

applicant  must  be  apparent.   Creditworthiness  of  an  applicant  can  be  

considered from two angles.  It may have two concepts, one is positive and  

the other is negative.  

Four aspects of creditworthiness are envisaged in the Regulations as  

would appear from the Explanation appended thereto, which are as under:-

(i) financial integrity of the applicant;

(ii) his competence;

(iii) his reputation and character; and  

(iv) his efficiency and honesty.

Article 19(1)(g) of the Constitution of India confers fundamental right  

on  every  citizen  to  carry  out  business,  trade,  profession  or  occupation.  

Clause (6)  of Article  19,  however,  provides for imposition of reasonable  

restrictions by a statute. [See Udai Singh Dagar  v. Union of India, {(2007)  

10 SCC 306 }].

In the event a statute provides for licensee, in a case of this nature, the  

same must thus be found to satisfy the test of reasonableness.   

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The  standard  for  determining  reasonableness  of  a  statute  so  as  to  

satisfy  the  constitutional  scheme  as  adumbrated  in  Article  14  of  the  

Constitution of India must receive a higher level of scrutiny than an ordinary  

statute.   Such a higher level of scrutiny is necessary not for the purpose of  

determining the Constitutionality of the statute alone vis-à-vis the field of  

legislative power as envisaged under Article 245 of the Constitution of India  

but also having regard to the object and purpose, the statute seeks to achieve.

Electricity  was  subject  to  strict  regulations.   It,  subject  to  just  

exceptions, was the monopoly of the State Electricity Boards, Public Sector  

Undertakings.   

Participation of the private sector inter alia in trading was encouraged  

by the provisions of the Act.  Court’s concern, therefore, would be not only  

to see that the Statute is intra vires the Constitutional scheme including the  

legislative field, but also as to whether it passes the test of reasonableness  

having regard to the  object  and purpose of  the  Act.    For  achieving the  

aforementioned purpose not only the premise, relevancy of the constitutional  

scheme in relation thereto is required to be taken into consideration as would  

be noticed a little later but therefor the doctrine of purposive interpretation  

should also be resorted to.   [ See New India Assurance Company Ltd.  v.  

Nusli Wadia and Another, { (2008) 3 SCC 279 } ]

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In  UCO Bank & Anr.  vs.  Rajinder Lal Capoor [(2008) 5 SCC 257],  

this Court held:

“26. It  is  now  a  well-settled  principle  of  interpretation of statutes that the court must give  effect to the purport and object of the Act.  Rule of  purposive construction should, subject of course to  the  applicability  of  the  other  principles  of  interpretation, be made applicable in a case of this  nature.”

When a disqualification is provided, it is to operate at the threshold in  

respect of the players in the field of trading in electricity.  

When,  however,  a  regulatory  statute  is  sought  to  be  enforced,  the  

power  of  the  authority  to  impose  restrictions  and  conditions  must  be  

construed  having  regard  to  the  purpose  and  object  it  seeks  to  achieve.  

Dealing in any manner with generation, distribution and supply and trading  

in electrical  energy is  vital  for the economy of the country.  The private  

players who are permitted or who are granted licence in this behalf may have  

to satisfy the conditions imposed.   

No  doubt,  such  conditions  must  be  reasonable.   Concededly,  the  

doctrine of proportionality may have to be invoked.  The Superior Court  

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would ensure that  the subordinate legislation has been framed within the  

four corners of the Act and is otherwise valid.  

22. The issue therefore which arises for our consideration is as to whether  

the delegation having been made for the purpose of carrying out the object,  

could the limitation be imposed for ascertaining as to whether the applicant  

is fit and proper person and disregarding his creditworthiness.  There cannot  

be any doubt whatsoever that a statute cannot be vague and unreasonable.   

23. Strong  reliance  has  also  been  placed  by  the  learned  Additional  

Solicitor General on a decision of this Court in Clariant International Ltd. &  

Anr. vs. Securities & Exchange Board of India [(2004) 8 SCC 524], wherein  

it was held that a discretionary jurisdiction has to be exercised having regard  

to the purpose for which it was conferred, the object sought to be achieved  

and the reasons for granting such wide discretion.  It was furthermore held  

that when any criterion is fixed by a statute or by a policy, an attempt should  

be  made  by the  authority  making the  delegated  legislation  to  follow the  

policy formulation broadly and substantially and in conformity therewith.  

(See also Secretary, Ministry of Chemicals & Fertilizers, Govt. of India vs.  

Cipla Ltd. & ors., (2003) 7 SCC 1, para 4.1).  There cannot be any doubt or  

dispute with regard to the aforementioned legal proposition.

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24. The  question,  which,  however,  falls  for  our  consideration  is  as  to  

whether the purported legislative policy is valid or not.  Such a question did  

not arise for consideration in Clariant (supra).

25. Yet again in State of T.N.  & Anr. vs. P. Krishnamurthy & ors. (2006)  

4 SCC 517, whereupon reliance has been placed by Mr. Tripathi, it has been  

held:

“15. There  is  a  presumption  in  favour  of  constitutionality  or  validity  of  a  subordinate  legislation and the burden is upon him who attacks  it  to  show  that  it  is  invalid.   It  is  also  well  recognized  that  a  subordinate  legislation  can  be  challenged under any of the following grounds:

(a) Lack of legislative competence to make the  subordinate legislation.

(b) Violation of fundamental  rights  guaranteed  under the Constitution of India.

(c) Violation  of  any  provision  of  the  Constitution of India.  

(d) Failure  to  conform  to  the  statute  under  which  it  is  made  or  exceeding  the  limits  of  authority conferred by the enabling Act.

(e) Repugnancy to the laws of the land, that is,  any enactment.  

(f) Manifest  arbitrariness/unreasonableness  (to  an extent where the court might well say that the  legislature  never  intended  to  give  authority  to  make such rules)

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16. The  court  considering  the  validity  of  a  subordinate  legislation,  will  have to  consider  the  nature, object and scheme of the enabling Act, and  also the area over which power has been delegated  under  the  Act  and  then  decide  whether  the  subordinate  legislation  conforms  to  the  parent  statute.  Where a rule is directly inconsistent with a  mandatory provision of the statute, then, of course,  the task of the court is simple and easy.  But where  the  contention  is  that  the  inconsistency  or  non- conformity of the rule is not with reference to any  specific provision of the enabling Act, but with the  object  and  scheme  of  the  parent  Act,  the  court  should  proceed  with  caution  before  declaring  invalidity.”

26. A legislative policy providing for qualification or disqualification of a  

person for  obtaining a  trading  licence  should  not  be  vague or  uncertain.  

Parameters  must  be  laid  down  therefor  for  determining  the  financial  

integrity, reputation, character, efficiency and honesty of the applicant.  An  

explanation  appended  to  clause  (f)  of  Regulation  6A points  out  various  

aspects that may be considered while determining the said criteria.   

However, what should be the criteria in regard to financial integrity,  

character, reputation, etc. have not been defined.  How and in what manner  

the said criteria are required to be ascertained have not been laid down, the  

criteria are subjective ones.   

20

27. A  disqualifying  statute,  in  our  opinion,  must  be  definite  and  not  

uncertain;  it  should not  be ambiguous or  vague.   Requisite  guidelines  in  

respect thereof should be laid down under the statute itself.  It is well settled  

that essential legislative function cannot be delegated.

It has been accepted by Mr. Tripathi that the explanation appended to  

clause (f) of Regulation 6A is not exhaustive.   

It  is  now  a  well  settled  principle  of  law  that  essential  legislative  

functions  cannot  be  delegated.   The  delegatee  must  be  furnished  with  

adequate guidelines so that arbitrariness is eschewed.  On what basis and in  

particular, keeping in view the possible loss of reputation and consequently  

the  business  of  an  applicant  for  grant  of  licence  would  suffer,  it  was  

obligatory on the part  of the Parliament  to lay down requisite  guidelines  

therefore.  The factors enumerated in the ‘Explanation’ appended to clause  

(f)  of  Regulation  6A are  unlimited.   For  determining the  question  as  to  

whether the applicant is a fit and proper person, a large number of factors  

may be taken into consideration.  It for all intent and purport would be more  

than  the  technical  requirement,  capital  adequacy  requirement  and  credit  

worthiness for being an ‘electricity trader’ as envisaged under Section 52 of  

the Act.

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An applicant usually would be a new applicant.  It  is possible that  

there had been no dealings by and between the applicant and the licensor.  

Each  one  of  the  criteria  laid  down  in  the  explanation  refers  to  

creditworthiness.   

28. In  State of Kerala & ors.  vs.  Unni & anr. [(2007) 2 SCC 365], this  

Court has held:

“When  a  subordinate  legislation  imposes  conditions upon a licensee regulating the manner  in which the trade is to be carried out,  the same  must  be based on reasonable  criteria.   A person  must have means to prevent commission of a crime  by himself or by his employees.  He must know  where he stands.  He must know to what extent or  under  what  circumstances  he  is  entitled  to  sell  liquor.  The statute in that sense must be definite  and not vague.  Where a statute is vague, the same  is liable to be struck down.”

In State of Rajasthan & ors.  vs.  Basant Nahata   [(2005) 12 SCC 77]  

Section 22-A of the Registration Act, 1908 which was inserted by Rajasthan  

Amendment Act 16 of 1976 was struck down, holding:-(1) The executive  

while making a subordinate legislation should not be permitted to open new  

heads of public policy, (2) the doctrine of public policy itself being uncertain  

cannot  be  a  guideline  for  anything  or  cannot  be  said  to  be  providing  

sufficient  framework  for  the  executive  to  work  under  it,  (3)  Essential  

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functions of the legislature cannot be delegated and it must be judged on the  

touchstone of Article 14 and Article 246 of the Constitution, and (4) only the  

ancillary  and  procedural  powers  can  be  delegated  and  not  the  essential  

legislative point.

29. Our attention has been drawn to some other legislations wherein the  

concept of ‘fit and proper person’ had been applied, namely, Securities and  

Exchange Board of India (Criteria for Fit and Proper Person) Regulations,  

2004.   

30. We have not been shown as to how the purpose and object of the said  

Regulations  can  be  said  to  be  in  pari  materia  with  the  Regulations  in  

question.  It  must also be borne in mind that an elaborate public hearing  

process is provided for grant of licence in terms of Section 15 of the Act.  

Such an independent inquiry cannot be carried out de hors the statute.  But  

the Parliament thought it fit to confer a hearing as regards public objection  

only.   

Regulation  6A  in  effect  confers  powers/discretion  on  matters  of  

licensing even in public hearing.  Such relevant factors which provide for the  

criteria laid down in Regulation 6A could be brought on record.  Section 15,  

however, empowers the Commission to specify the form and manner of the  

23

application and the fees that is required to be attached.  The parliamentary  

object must be read in the context of the preamble.   

The reform legislation sought to bring in transparency in the work of  

the public sector.  It postulates competition from the private sector.  Only  

such a competition now would give rise to a development of a proper market  

in  the  long  run.   The  power  of  the  Regulatory  Commission  to  impose  

qualification/restrictions should be read in line with the larger object of the  

Act.   The Consumer tariff  is  to be laid down by the Commission.   How  

licensees would operate their business to the extent permissible under law  

should be subject to Regulation, which ordinarily should not be resorted to  

discourage private participation in the power sector.   A trader of electricity  

does  not  deal  with  consumers;  he  is  merely  an  intermediary  between  a  

generating company and a distribution licensee.  The tariff that a distribution  

licensee will charge from its consumers is regulated. Even the margin that a  

trader can make is regulated.  It  is,  therefore, not correct  to contend that  

Regulation 6A is in consumer interest as it has not been shown how it will  

protect the consumer interest.   

ULTRA VIRES ISSUE

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31. Section 52 of the Act is without prejudice to the provisions contained  

in  sub-Section  (c)  of  Section  12.   By  reason  of  the  said  provision  the  

appropriate Government is vested with the power to specify:- (1) Technical  

requirement; (2) Capital adequacy requirement and; (3) Creditworthiness in  

relation to an electricity trader.  

Regulation  6  deals  with  capital  adequacy  requirement  and  

creditworthiness.  Regulation 6A (b), therefore, cannot have anything to do  

with capital adequacy requirement and creditworthiness.  The finding of the  

High Court to that effect cannot be upheld as Regulation 6A is a stand alone  

provision providing for a set  of disqualifications.    Although by the said  

provisions, it cannot be said that the legislature has exhausted itself but the  

same should also be taken into consideration for the purpose of determining  

the  effect  of  the  Regulations.   As  Section  52  does  not  empower  the  

Regulation making authority to provide for qualification or disqualification,  

the delegated legislation or a subordinate legislation as is well known must  

conform exactly to the power granted.   

In Supreme Court Employees’ Welfare Association vs. Union of India  

& Anr. [(1989) 4 SCC 187], this Court has held:-

“62. Thus  as  delegated  legislation  or  a  subordinate legislation must conform exactly to the  

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power granted.  So far as the question of grant of  approval  by  the  President  of  India  under  the  proviso to Article  146 (2)  is  concerned,  no such  conditions  have  been  laid  down  to  be  fulfilled  before the President of India grants or refuses to  grant approval.  By virtue of Article 74(1) of the  Constitution,  the  President  of  India  shall,  in  exercise  of  his  functions,  act  in  accordance with  the advice of the Council  of Ministers.   In other  words,  it  is  the  particular  department  in  the  Ministry  that  considers  the  question  of  approval  under  the  proviso  to  Article  146  (2)  of  the  Constitution and whatever advice is  given to the  President of India in that regard, the President of  India has to act  in accordance with such advice.  On the other hand, the Chief Justice of India has to  apply  his  mind  when  he  frames  the  rules  under  Article 146(2) with the assistance of his officers.  In  such  circumstances,  it  would  not  be  unreasonable  to  hold  that  the  delegation  of  the  legislative  function on the Chief  Justice of India  and also on the President of India relating to the  salaries,  allowances,  leave  and  pensions  of  the  officers  and  servants  of  the  Supreme  Court  involve, by necessary implication, the application  of  mind.   So,  not  only  that  the  Chief  Justice  of  India has to apply his mind to the framing of rules,  but also the government has to apply its mind to  the question of approval of the rules framed by the  Chief  Justice  of  India  relating  to  salaries,  allowances,  leave  or  pensions.   This  condition  should be fulfilled and should appear to have been  so  fulfilled  from  the  records  of  both  the  government  and the Chief  Justice  of India.   The  application  of  mind  will  include  exchange  of  thoughts and views between the government and  the Chief Justice of India and it is highly desirable  that there should be a consensus between the two.  The  rules  framed  by  the  Chief  Justice  of  India  should  normally  be  accepted  by  the  government  and  the  question  of  exchange  of  thoughts  and  

26

views will arise only when the government is not  in a position to accept the rules relating to salaries,  allowances, leave or pensions.”

32. We  may  now  consider  the  provisions  of  Section  178  of  the  Act.  

Although various clauses contained therein are merely illustrative in nature  

and not exhaustive, we will assume that although the matter relating to grant  

of licence is covered by Section 12 and 14 of the Act, the Regulation making  

power may also be available for the said purpose.   

33. We have noticed hereinbefore the effect of sub-Section (1) of Section  

178.   We  may  only  notice  that  clauses  (a),  (b),  (c)  and  (o)  which  are  

referable to the provisions of Sections 14 and 15 as such do not provide for  

any power to deal with disqualification authorizing the respondent to frame  

regulation. This Court in  Kerala Samasthana Chethu Thozhilali  Union  vs.  

State of Kerala & ors. [(2006) 4 SCC 327] held as under:

“37. Furthermore, the terms and conditions which  can  be  imposed  by  the  State  for  the  purpose  of  parting with its right of exclusive privilege more or  less  have  been  exhaustively  dealt  with  in  the  illustrations in sub-section (2) of Section 29 of the  Act.  There cannot be any doubt whatsoever that  the  general  power  to  make  rules  is  contained  in  sub-section  (1)  of  Section  29.   The  provisions  contained  in  sub-section  (2)  are  illustrative  in  nture.  But, the factors enumerated in sub-section  (2) of Section 29 are indicative of the heads under  

27

which  the  statutory  framework  should  ordinarily  be worked out.”

34. We  have  seen  that  clause  (b)  of  Regulation  6A  provides  for  a  

disqualification only on the ground of involvement of the applicant or any of  

its promoters, partners, directors, associates etc. in any legal proceeding. The  

same may or may not by itself be sufficient to disqualify a person, but the  

Commission must be satisfied that grant of licence in the circumstance may  

adversely affect  the interest  of the electricity  sector or  of the consumers.  

Such legal proceedings are, apart from the judgment of convictions of an  

offence involving moral turpitude or any economic offence on the part of the  

applicant or his partner, or promoter, or Director, or associates at any time in  

the past, as it may have something to do with the pending legal proceedings  

in which the Commission is a party.   

The  correctness  of  the  Commission’s  determination  of  a  dispute  

between the applicant  and the Commission may be a subject  matter  of a  

legal proceeding.  Only because a legal proceeding had been pending and the  

Commission is of the opinion that the same adversely affects the interest of  

the electricity sector or of the consumers, in our opinion, cannot by itself be  

an  objective  criteria  as  by  reason  thereof  the  statutory  authority  would  

necessarily  be  required  to  enter  into  the  merit  of  the  proceeding.   The  

28

members of the Commission need not necessarily be trained in law; they  

may not be having legal background and, thus, a power conferred on it so as  

to directly or indirectly enter into the merit of a legal proceeding in which it  

may itself be involved, in our opinion, would not be a fair and reasonable  

criteria.   

We are unmindful of the fact that clause (f) to Regulation 6A of the  

Regulations mandates recording of reasons in writing.  In the event, thus, if  

wrong reasons are recorded a judicial review would be maintainable.  But  

availability of judicial review itself, although is a relevant factor, by itself  

cannot  be  a  ground  to  declare  a  subordinate  legislation  valid  which  

otherwise it is not.  {See State of Kerala & Ors. vs. Unni & Anr. [(2007) 2  

SCC 365]}

Judicial review from an administrative decision lies on a very narrow  

compass.  The superior courts in exercise of their jurisdiction under Article  

226 or 32 of the Constitution of India ordinarily would not enter into the  

merit  of the matter.   Their primary concern are with the decision making  

process.

LOCUS STANDI OF THE APPELLANT

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35. Mr.  Tripathi  would  urge  that  the  appellant  had  no  vested  right  in  

regard to grant  of  licence.   It  may be so.   But  then it  has a right  to  be  

considered therefor.  Consideration for such grant must be based on a legal  

and  valid  statute.   The  case  of  the  applicant  cannot  be  rejected  at  the  

threshold relying on or on the basis of statutory provisions which are ultra  

vires.  Submission of Mr. Tripathi that the appellant had no locus standi to  

question the validity of the Regulation, therefore, is not correct.   

36. In  Tashi Delek Gaming Solutions Ltd.  vs.  State of Karnataka & ors.  

[(2006) 1 SCC 442], this Court held:

“If by a statutory provision the right of an agent to  carry on his business is affected,  he may, in our  considered opinion, in his own right maintain an  action.”

[See also Calcutta Gas Company (Proprietary) Ltd. vs. State of West  

Bengal & ors. (AIR 1962 SC 1044)]

37. Strong reliance has been placed by Mr. Tripathi as also by the High  

Court on  State of Tamil Nadu  vs.  M/s Hind Stone & ors. [(1981) 2 SCC  

205].  One of the issues involved therein was renewal of existing mining  

lease where applicants had filed applications before the coming into force of  

the  new mining policy.   Merely  an application  was filed  and no further  

30

action had been taken. In the aforementioned fact situation, this Court while  

opining  that  applications  for  grant  of  mining  lease  should  be  dealt  with  

within a reasonable  time but  on that  account  the applicant  would not  be  

clothed with a right for disposal thereof, stating:

“…No  one  has  a  vested  right  to  the  grant  or  renewal  of  a  lease  and none  can  claim a vested  right  to  have  an  application  for  the  grant  or  renewal of a lease dealt with in a particular way,  by applying particular provisions.  In the absence  of any vested rights in anyone, an application for a  lease has necessarily to be dealt with according to  the rules in force on the date of the disposal of the  application  despite  the  fact  that  there  is  a  long  delay since the making of the application.”

No exception thereto  can be taken.   Here,  however,  appellant  was  

found eligible for grant of trading licence.  He was found to be qualified.   

38. Reliance has also been placed on S.B. International Limited & ors. vs.  

Assistant  Director General of Foreign Trade & ors. [(1996) 2 SCC 439],  

wherein in the scheme and context, it was held that no vested right accrued  

to the licensee for issuance of advance licence.  

LEGITIMATE EXPECTATION

39. Appellant applied for grant of licence. He was found to be qualified  

therefor  having  satisfied  the  statutory  requirements.   It  was  granted  an  

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interim licence.   It  has started trading in electricity.   It,  therefore,  had a  

legitimate expectation that in considering the application for grant of licence,  

the same criteria as laid down in the statute shall be applied.  

In P.T.R. Exports (Madras) Private Limited & ors. vs. Union of India  

& ors. [(1996) 5 SCC 268], whereupon reliance has been placed, this Court  

inter  alia  opined  that  in  the  matter  of  grant  of  licence  the  doctrine  of  

legitimate expectation would have no role to play as it would depend upon  

the policy prevailing on the date of grant of licence.   

It was again a case where an Export and Import Policy to be notified  

by  the  Central  Government  under  the  Foreign  Trade  (Development  and  

Regulation) Act, 1992 was involved.   

40. Reliance has also been placed on M.P. Ram Mohan Raja vs. State of  

T.N. & ors. (supra).   Therein  also like  Hind Stone (supra)  there was  no  

intimation  from the State  Government  to  the  applicant  that  it  was  found  

qualified for grant of mining lease.   

41. Reliance has also been placed by Mr. Tripathi on  Commissioner of  

Municipal Corporation, Shimla vs. Prem Lata Sood & ors. [(2007) 11 SCC  

40].  This Court therein was concerned with a planning and development  

statute framed under the Himachal Pradesh Town and Country Planning Act,  

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1977.  In that case, this Court was considering the enforcement of right in  

several  stages  holding  that  the  ‘conditions  precedent’  laid  down  therein  

unless satisfied no right can be said to have vested in the person concerned.   

42. The cases relied upon by Mr. Tripathi are distinguishable on fact.  We  

accept the general principle that an applicant by filing a mere application  

cannot be said to have derived a vested right but we are of the opinion that  

he has a right to be considered.  It  will  bear repetition to state that such  

consideration must be made not only on the basis of a valid statute but also  

rationale and objective criteria should be applied therefor.     

EPILOGUE

43. The law sometimes can be written in such subjective manner that it  

affects efficiency and transparent function of the government. If the statute  

provides for point-less discretion to agency, it is in essence demolishing the  

accountability strand within the administrative process as the agency is not  

under obligation from an objective norm, which can enforce accountability  

in decision-making process. All law making, be it in the context of delegated  

legislation or primary legislation, have to conform to the fundamental tenets  

of  transparency  and  openness  on  one  hand  and  responsiveness  and  

accountability on the other. These are fundamental tenets flowing from Due  

33

Process requirement under Article 21, Equal Protection clause embodied in  

Article 14 and Fundamental Freedoms clause ingrained under Article 19. A  

modern  deliberative  democracy  can not  function without  these attributes.  

The  constitutive  understanding  of  aforementioned  guarantees  under  the  

Fundamental Rights chapter in the Constitution does not give rise to a mere  

rhetoric and symbolic value inhered by the polity but has to be reflected in  

minute functioning of all the three wings of state – executive, legislature and  

judiciary. When we talk of state action, devil lies in the detail. The approach  

to writing of laws, rules, notifications etc. has to showcase these concerns.  

The image of law which flows from this framework is its neutrality  

and objectivity: the ability of law to put sphere of general decision-making  

outside the discretionary power of those wielding governmental power. Law  

has  to  provide  a  basic  level  of  "legal  security"  by  assuring  that  law  is  

knowable,  dependable  and  shielded  from excessive  manipulation.  In  the  

context of rule making, delegated legislation should establish the structural  

conditions  within  which  those  processes  can  function  effectively.  The  

question which needs to be asked is whether delegated legislation promotes  

rational and accountable policy implementation.

34

While we say so, we are not oblivious of the contours of the judicial  

review  of  legislative  acts.   But,  we  have  made  all  endeavours  to  keep  

ourselves confined within the well-known parameters.

A subjectively worded normative device also enables the agency to  

acquire rents. It determines the degree of accountability and responsiveness  

of officials and of political and judicial control of the bureaucracy.  

However, when the provision inherently perpetuates injustice in the  

award of licenses and brings uncertainty and arbitrariness it would be best to  

stop the government  in the tracks. Since the vires of the regulation is under  

challenge,  we  took  the  opportunity  to  consider  the  propriety  and  

constitutionality of generic decision-making process encapsulated under the  

impugned legislation. Amongst others, in this context, we strike down the  

impugned clause.  

44. For the reasons aforementioned,  the  impugned judgment cannot  be  

sustained.  It is set aside accordingly.   

Clauses  (b)  and  (f)  of  Regulation  6A  are  declared  ultra  vires  the  

Constitution  of  India  as  also  the  Act.   The  Commission  is  directed  to  

consider the matter from the same stage as if the provisions had not come  

35

into force, as expeditiously as possible, and preferably within a period of  

three months from the date of receipt of a copy of this order.   

45. The  appeals  are  allowed  with  costs.   Counsel  fee  assessed  at  

Rs.50,000/-.

……………….…..………….J. [S.B. Sinha]

..………………..……………J.  [Cyriac Joseph]

New Delhi; May 11, 2009

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