Department of Disinvestment- Manual

A general fear among the employees at the time of disinvestment is that they may be retrenched or their pay scales and services conditions may be adversely affected. Global experience shows that if the privatised companies grow rapidly, labour re-structuring may not be required. A number of protections are available to the employees under various labour laws. These labour laws are applicable to the company irrespective of whether it is in the Public Sector or in the Private Sector. Besides this, employee protection can be ensured by incorporating suitable clauses in the Shareholders' Agreement.

Applicability of Industrial Disputes Act 1947

The provisions of Industrial Disputes Act, 1947 are applicable to the company even after disinvestment. Under the Industrial Disputes Act, "Industrial establishment or undertaking" has been defined under Section 2(Ka). The Section reads as follows :

2(Ka) "Industrial establishment or undertaking" means an establishment or undertaking in which any industry is carried on:

Provided that where several activities are carried on in an establishment or undertaking and only one or some of such activities is or are an industry or industries, then, -

if any unit of such establishment or undertaking carrying on any activity, being an industry, is severable from the other unit or units of such establishment or undertaking such, unit shall be deemed to be a separate industrial establishment or undertaking;

if the predominant activity or each of the predominant activity carried on in such establishment or undertaking or any unit      thereof is an industry and the other activity or each of the other activities carried on in such establishment or undertaking      or unit thereof is not severable from and is, for the purpose of carrying on, or aiding the carrying on of, such      predominant      activity or activities, the entire establishment or undertaking or, as the case may be , unit thereof shall be      deemed to be      an industrial establishment or undertaking.

In view of the above definition the company will remain an industrial establishment even after the disinvestment and all the provisions of Industrial Disputes Act will automatically apply to the company. The trade unions may be having an apprehension that workers of a PSU enjoy more protection under the law of the land than those in the private sector. As a matter of fact, so long a venture is "industrial establishment", the provisions of Industrial Disputes Act are applicable to that venture, irrespective of it being in public sector or private sector.

Provisions governing service conditions

The companies normally have "Certified Standing Orders" for their workmen. The Standing Orders have been certified under the Industrial Employment (Standing Orders) Act, 1946. The service conditions of the workmen of the company are normally governed by the said "Certified Standing Orders". If, after disinvestment, the prospective buyer proposes to make any change in the service conditions applicable to the workmen, he has to give a notice in the prescribed manner under Section 9-A of the Industrial Disputes Act. Section 9-A of the Industrial Disputes Act reads as follow:

SECTION 9-A
NOTICE OF CHANGE

No employer, who proposes to affect any change in the conditions of service applicable to any workman in respect of any matter specified in the Fourth Schedule, shall affect such change-

(a) without giving to the workmen likely to be affected by such change a notice in the prescribed manner of the nature of change      proposed to be affected; or

(b) within twenty-one days of giving such notice

Provided that no notice shall be required for affecting any such change-

(a) where the change is affected in pursuance of any settlement or award; or

(b) where the workmen likely to be affected by the change are persons to whom the Fundamental and supplementary Rules,      Civil Services (Classification, Control and Appeal) Rules, Civil Service (Temporary Service) Rules, Revised Leave Rules,      Civil Service Regulations, Civilians in Defence Services (Classification, Control and Appeal) Rules, or the Indian Railway      Establishment Code or any other rules or regulations that may be notified in this behalf by the appropriate Government in the      official Gazette, apply.

The Fourth Schedule as mentioned in the above definition is being reproduced below:-

THE FOURTH SCHEDULE (See Section 9-A)

CONDITION OF SERVICE FOR CHANGE OF WHICH NOTICE IS GIVEN

1. Wages, including the period and mode of payment;

2. Contribution paid, or payable, by the employer to any provident fund or pension fund or for the benefit of the workmen     under     any law for the time being in force;

3. Compensatory and other allowance;

4. Hours of work and rest intervals;

5. Leave with wages and holidays;

6. Starting, alteration or discontinuance of shift working otherwise than in accordance with standing orders;

7. Classification by grades;

8. Withdrawal of any customary concession or privilege or change in usage;

9. Introduction of new rules of discipline, or alteration in existing rules, except in so far as they are provided in standing orders;

10. Rationalization, standardisation or improvement of plant or technique, which is likely to lead to retrenchment of workmen;

11. Any increase or reduction (other than casual) in the number of persons employed or to be employed in any occupation       or processes or department of shift (not occasioned by circumstances over which the employer has no control).

Thus under the provisions of Industrial Disputes Act, 1947, read with the provisions of Industrial Employment (Standing Orders) Act, 1946, any change in the service conditions of the workmen will be governed by the provisions of the law of the land as applicable in the company prior to the disinvestment. It is not to say that Certified Standing Orders cannot be changed even prior to the disinvestment by the company management. But as law prescribes, a notice has to be given by the management to the workmen which does not necessarily mean that just by giving a notice, service conditions may be changed in a manner detrimental to the interest of the workers. If the workers find that notice envisages change in working conditions detrimental to their interests, they can immediately raise an "Industrial Dispute" before the Appropriate Authorities defined under the Act. The "Industrial Dispute" has been defined under Section 2K of the Industrial Disputes Act, which reads as follows:

"Industrial Dispute" means any dispute or difference between employers and employees, or between employers and workmen, or between workmen and workmen, which is connected with the employment or non-employment or the terms of employment or with the conditions of labour of any person;"

Chapter II of the Industrial Disputes Act deals with Authorities under the act and subsequent chapters lay down procedures etc. with regard to the redressal of Industrial Disputes. Hence, under the existing provisions of Industrial Disputes Act, 1947, the interests of the workmen will remain protected as much as these are protected now under the present dispensation.

In an organised sector, the issues of job security, wage structure, perks, welfare facilities, etc. of the workers are governed by bipartite/tripartite agreements. These agreements are in the nature of "settlement" as defined under Section 2p and as protected under various provisions of the act. Even after the disinvestment, the company management will be required to enter into bipartite/tripartite agreements with the workmen through Unions, and the terms and conditions in the agreement would be always governed by the practices and procedures applicable under collective bargaining. It is a fact that any agreement between two or more parties is based on the principles of mutual consent. Hence, the consent of the management to better service conditions, etc. would certainly depend on the achievement of the productivity and production targets by the workers from time to time.

Protection against arbitrary/closure of an undertaking

Regarding protection against arbitrary closure of any establishment of the Company, it is to be noted that the "Closure" of an Industrial Establishment is governed by Section 25(O) of the Industrial Dispute Act. Section 25(O) reads as follows : -

(1) An employer who intends to close down an undertaking of an industrial establishment to which this chapter applies shall,      in the prescribed manner, apply, for prior permission at least ninety days before the date on which the intended closure is to      become effective, to the appropriate Government, stating clearly the reasons for the intended closure of the undertaking and      a copy of such application shall also be served simultaneously on the representatives of the workmen in the prescribed      manner :

Provided that nothing in this sub-section shall apply to an undertaking set up for the construction of buildings, bridges, roads, canals, dams or for other construction work.

(2) Where an application for permission has been made under sub-section (1), the appropriate Government, after making            such enquiry as it things fit and after giving a reasonable opportunity of being heard to the employer, the workmen and the      person interested in such closure may, having regard to the genuineness' and adequacy of the reasons stated by the      employer, the interests of the general public and all other relevant factors, by order and for reasons to be recorded in      writing, grant or refuse to grant such permission and a copy of such other order shall be communicated to the employer      and the workmen.

(3) Where an application has been made under sub-section (1) and the appropriate Government does not communicate the      order granting or refusing to grant permission to the employer within a period of sixty days from the date on which such      application is made, the permission applied for, shall be deemed to have been granted on the expiration of the said period of      sixty days.

(4) An order of the appropriate Government granting or refusing to grant permission shall, subject to the provision of sub-section
     (5), be final and binding on all the parties and shall remain in force for one year from the date of such order.

(5) The appropriate Government may, either on its own motion or on the application made by the employer, or any workman,      review its order granting or refusing to grant permission under sub-section (2) or refer the matter to a Tribunal for      adjudication :

Provided that where a reference has been made to a Tribunal under this sub-section, it shall pass an award within a period of thirty days from the date of such reference.

(6) Where no application for permission under sub-section(1) is made within a period specified therein, or where the       permission for closure has been refused, the closure of the undertaking shall be deemed to be illegal from the date of       closure and the workmen shall be entitled to all the benefits under any law for the time being in force as if the       undertaking had not been closed down.

(7) Notwithstanding anything contained in the foregoing provisions of this section, the appropriate Government may, if it is      satisfied that owing to such exceptional circumstances as accident in the undertaking or death of the employer or the      like, it is necessary so to do, by order, direct that the provisions of sub-section (1) shall not apply in relation to such      undertaking for such period as may be specified in the order.

(8) Where an undertaking is permitted to be closed down under sub section(2) or where permission for closure is deemed to be     granted under sub-section(3) every workman who is employed in that undertaking immediately before the date of application     for permission under this section, shall be entitled to receive compensation which shall be equivalent to fifteen days' average     pay for every completed year of continuous service or any part thereof in excess of six months.

From the above definition it is clear that the company management before or after disinvestment is not free to close down any part of the company at their sweet will. The closure is governed by the law of land and so for the existing provisions of Industrial Disputes Act are concerned, "genuineness and adequacy of the reasons stated by the employer" and "the interests of the general public and all other relevant factors", have to be examined by the appropriate Government and, for doing that the Government has to give a reasonable opportunity of hearing to the employer and workmen and the persons interested in such closure. It means that unless and until the appropriate Government grants permission, the company management will not be competent to close down any undertaking of the company even after disinvestment. So there are protections available under the Act against arbitrary closure of any undertaking of the company after disinvestment.

At times, some trade unions demand assurances regarding peripheral development after the disinvestment of the company, which are being enjoyed by the villages adjoining the plant. Contract labourers also demand regularization of their jobs before the disinvestment. Under the law, no employer can be forced to make investment in the peripheral development. However, as a prudent management practice, bigger companies invest substantially in the development of the areas around them. It is expected that the successor management will consider this issue favourably. So far the regularization of contract labour is concerned, PSU or no PSU, an industrial undertaking in this regard is governed by the provisions of Contract Labour (Regulation and Prohibition) Act, 1970 and Rules made thereunder. Hence, the contract labourers and unions representing their interest may take recourse to the said Act and Rules after the disinvestment and may pursue the matter in furtherance of their demands.

Regarding functional Directors, provisions are made in the Share Purchase Agreement that they shall be deemed to be nominees of the buyer. However, the buyer has been given an option to remove them. But, in that case, they may be given a notice of six months or pay in lieu thereof. The Government of India may also take steps to relocate them in case of Strategic Partner not retaining them. In any case, functional Directors are contractual appointees and after termination of the contract, they are entitled to terminal benefits, leave encashment, gratuity etc. as per the rules of the company.

Provisions in the Shareholders' Agreement

Shareholders' Agreement generally incorporates the concerns of the Government regarding employee protection. Normally, the following clauses are kept in the Shareholders' Agreement:

1. The parties envision that all employees of the company on the date hereof shall continue in the employment of the     company. (If there are surpluses, the Government tries to give VRS/VSS before disinvestment).

2. The Company shall not retrench any part of its labour force for a stipulated period from the closing date other than any     dismissal or termination of employees of the Company from their employment in accordance with the applicable staff     regulations and standing orders of the Company or applicable Law.

3. Typically the agreements include a recital stating that the strategic partner recognizes that the Government in relation to its     employment policies follows certain principles for the benefit of the members of the Scheduled Caste/Scheduled Tribes,     Physically Handicapped persons and other socially disadvantaged sections of the society and that the strategic partner     shall use its best efforts to cause the company to provide adequate job opportunities for such persons. Further, in the     event of any reduction in the strength of the employees of the company, the strategic partner shall use its efforts to ensure     that the physically handicapped persons are retrenched at the end.

4. Subject to the above Clauses, any restructuring of the labour force of the Company shall be implemented in the manner     recommended by the Board and in accordance with all applicable laws. The strategic partner in the event of any     reduction     of the strength of its employees shall, ensure that the Company offers its employees an option to voluntarily     retire on terms     that are to, in any manner, less favourable than the voluntary retirement scheme offered by the Company     on the date of the     agreement.

EMPLOYEES' ISSUES
A general fear among the employees at the time of disinvestment is that they may be retrenched or their pay scales and services conditions may be adversely affected. Global experience shows that if the privatised companies grow rapidly, labour re-structuring may not be required. A number of protections are available to the employees under various labour laws. These labour laws are applicable to the company irrespective of whether it is in the Public Sector or in the Private Sector. Besides this, employee protection can be ensured by incorporating suitable clauses in the Shareholders' Agreement. Applicability of Industrial Disputes Act 1947 The provisions of Industrial Disputes Act, 1947 are applicable to the company even after disinvestment. Under the Industrial Disputes Act, "Industrial establishment or undertaking" has been defined under Section 2(Ka). The Section reads as follows : 2(Ka) "Industrial establishment or undertaking" means an establishment or undertaking in which any industry is carried on: Provided that where several activities are carried on in an establishment or undertaking and only one or some of such activities is or are an industry or industries, then, - if any unit of such establishment or undertaking carrying on any activity, being an industry, is severable from the other unit or units of such establishment or undertaking such, unit shall be deemed to be a separate industrial establishment or undertaking; if the predominant activity or each of the predominant activity carried on in such establishment or undertaking or any unit thereof is an industry and the other activity or each of the other activities carried on in such establishment or undertaking or unit thereof is not severable from and is, for the purpose of carrying on, or aiding the carrying on of, such predominant activity or activities, the entire establishment or undertaking or, as the case may be , unit thereof shall be deemed to be an industrial establishment or undertaking. In view of the above definition the company will remain an industrial establishment even after the disinvestment and all the provisions of Industrial Disputes Act will automatically apply to the company. The trade unions may be having an apprehension that workers of a PSU enjoy more protection under the law of the land than those in the private sector. As a matter of fact, so long a venture is "industrial establishment", the provisions of Industrial Disputes Act are applicable to that venture, irrespective of it being in public sector or private sector. Provisions governing service conditions The companies normally have "Certified Standing Orders" for their workmen. The Standing Orders have been certified under the Industrial Employment (Standing Orders) Act, 1946. The service conditions of the workmen of the company are normally governed by the said "Certified Standing Orders". If, after disinvestment, the prospective buyer proposes to make any change in the service conditions applicable to the workmen, he has to give a notice in the prescribed manner under Section 9-A of the Industrial Disputes Act. Section 9-A of the Industrial Disputes Act reads as follow: SECTION 9-A NOTICE OF CHANGE No employer, who proposes to affect any change in the conditions of service applicable to any workman in respect of any matter specified in the Fourth Schedule, shall affect such change- (a) without giving to the workmen likely to be affected by such change a notice in the prescribed manner of the nature of change proposed to be affected; or (b) within twenty-one days of giving such notice Provided that no notice shall be required for affecting any such change- (a) where the change is affected in pursuance of any settlement or award; or (b) where the workmen likely to be affected by the change are persons to whom the Fundamental and supplementary Rules, Civil Services (Classification, Control and Appeal) Rules, Civil Service (Temporary Service) Rules, Revised Leave Rules, Civil Service Regulations, Civilians in Defence Services (Classification, Control and Appeal) Rules, or the Indian Railway Establishment Code or any other rules or regulations that may be notified in this behalf by the appropriate Government in the official Gazette, apply. The Fourth Schedule as mentioned in the above definition is being reproduced below:- THE FOURTH SCHEDULE (See Section 9-A) CONDITION OF SERVICE FOR CHANGE OF WHICH NOTICE IS GIVEN 1. Wages, including the period and mode of payment; 2. Contribution paid, or payable, by the employer to any provident fund or pension fund or for the benefit of the workmen under any law for the time being in force; 3. Compensatory and other allowance; 4. Hours of work and rest intervals; 5. Leave with wages and holidays; 6. Starting, alteration or discontinuance of shift working otherwise than in accordance with standing orders; 7. Classification by grades; 8. Withdrawal of any customary concession or privilege or change in usage; 9. Introduction of new rules of discipline, or alteration in existing rules, except in so far as they are provided in standing orders; 10. Rationalization, standardisation or improvement of plant or technique, which is likely to lead to retrenchment of workmen; 11. Any increase or reduction (other than casual) in the number of persons employed or to be employed in any occupation or processes or department of shift (not occasioned by circumstances over which the employer has no control). Thus under the provisions of Industrial Disputes Act, 1947, read with the provisions of Industrial Employment (Standing Orders) Act, 1946, any change in the service conditions of the workmen will be governed by the provisions of the law of the land as applicable in the company prior to the disinvestment. It is not to say that Certified Standing Orders cannot be changed even prior to the disinvestment by the company management. But as law prescribes, a notice has to be given by the management to the workmen which does not necessarily mean that just by giving a notice, service conditions may be changed in a manner detrimental to the interest of the workers. If the workers find that notice envisages change in working conditions detrimental to their interests, they can immediately raise an "Industrial Dispute" before the Appropriate Authorities defined under the Act. The "Industrial Dispute" has been defined under Section 2K of the Industrial Disputes Act, which reads as follows: "Industrial Dispute" means any dispute or difference between employers and employees, or between employers and workmen, or between workmen and workmen, which is connected with the employment or non-employment or the terms of employment or with the conditions of labour of any person;" Chapter II of the Industrial Disputes Act deals with Authorities under the act and subsequent chapters lay down procedures etc. with regard to the redressal of Industrial Disputes. Hence, under the existing provisions of Industrial Disputes Act, 1947, the interests of the workmen will remain protected as much as these are protected now under the present dispensation. In an organised sector, the issues of job security, wage structure, perks, welfare facilities, etc. of the workers are governed by bipartite/tripartite agreements. These agreements are in the nature of "settlement" as defined under Section 2p and as protected under various provisions of the act. Even after the disinvestment, the company management will be required to enter into bipartite/tripartite agreements with the workmen through Unions, and the terms and conditions in the agreement would be always governed by the practices and procedures applicable under collective bargaining. It is a fact that any agreement between two or more parties is based on the principles of mutual consent. Hence, the consent of the management to better service conditions, etc. would certainly depend on the achievement of the productivity and production targets by the workers from time to time. Protection against arbitrary/closure of an undertaking Regarding protection against arbitrary closure of any establishment of the Company, it is to be noted that the "Closure" of an Industrial Establishment is governed by Section 25(O) of the Industrial Dispute Act. Section 25(O) reads as follows : - (1) An employer who intends to close down an undertaking of an industrial establishment to which this chapter applies shall, in the prescribed manner, apply, for prior permission at least ninety days before the date on which the intended closure is to become effective, to the appropriate Government, stating clearly the reasons for the intended closure of the undertaking and a copy of such application shall also be served simultaneously on the representatives of the workmen in the prescribed manner : Provided that nothing in this sub-section shall apply to an undertaking set up for the construction of buildings, bridges, roads, canals, dams or for other construction work. (2) Where an application for permission has been made under sub-section (1), the appropriate Government, after making such enquiry as it things fit and after giving a reasonable opportunity of being heard to the employer, the workmen and the person interested in such closure may, having regard to the genuineness' and adequacy of the reasons stated by the employer, the interests of the general public and all other relevant factors, by order and for reasons to be recorded in writing, grant or refuse to grant such permission and a copy of such other order shall be communicated to the employer and the workmen. (3) Where an application has been made under sub-section (1) and the appropriate Government does not communicate the order granting or refusing to grant permission to the employer within a period of sixty days from the date on which such application is made, the permission applied for, shall be deemed to have been granted on the expiration of the said period of sixty days. (4) An order of the appropriate Government granting or refusing to grant permission shall, subject to the provision of sub-section (5), be final and binding on all the parties and shall remain in force for one year from the date of such order. (5) The appropriate Government may, either on its own motion or on the application made by the employer, or any workman, review its order granting or refusing to grant permission under sub-section (2) or refer the matter to a Tribunal for adjudication : Provided that where a reference has been made to a Tribunal under this sub-section, it shall pass an award within a period of thirty days from the date of such reference. (6) Where no application for permission under sub-section(1) is made within a period specified therein, or where the permission for closure has been refused, the closure of the undertaking shall be deemed to be illegal from the date of closure and the workmen shall be entitled to all the benefits under any law for the time being in force as if the undertaking had not been closed down. (7) Notwithstanding anything contained in the foregoing provisions of this section, the appropriate Government may, if it is satisfied that owing to such exceptional circumstances as accident in the undertaking or death of the employer or the like, it is necessary so to do, by order, direct that the provisions of sub-section (1) shall not apply in relation to such undertaking for such period as may be specified in the order. (8) Where an undertaking is permitted to be closed down under sub section(2) or where permission for closure is deemed to be granted under sub-section(3) every workman who is employed in that undertaking immediately before the date of application for permission under this section, shall be entitled to receive compensation which shall be equivalent to fifteen days' average pay for every completed year of continuous service or any part thereof in excess of six months. From the above definition it is clear that the company management before or after disinvestment is not free to close down any part of the company at their sweet will. The closure is governed by the law of land and so for the existing provisions of Industrial Disputes Act are concerned, "genuineness and adequacy of the reasons stated by the employer" and "the interests of the general public and all other relevant factors", have to be examined by the appropriate Government and, for doing that the Government has to give a reasonable opportunity of hearing to the employer and workmen and the persons interested in such closure. It means that unless and until the appropriate Government grants permission, the company management will not be competent to close down any undertaking of the company even after disinvestment. So there are protections available under the Act against arbitrary closure of any undertaking of the company after disinvestment. At times, some trade unions demand assurances regarding peripheral development after the disinvestment of the company, which are being enjoyed by the villages adjoining the plant. Contract labourers also demand regularization of their jobs before the disinvestment. Under the law, no employer can be forced to make investment in the peripheral development. However, as a prudent management practice, bigger companies invest substantially in the development of the areas around them. It is expected that the successor management will consider this issue favourably. So far the regularization of contract labour is concerned, PSU or no PSU, an industrial undertaking in this regard is governed by the provisions of Contract Labour (Regulation and Prohibition) Act, 1970 and Rules made thereunder. Hence, the contract labourers and unions representing their interest may take recourse to the said Act and Rules after the disinvestment and may pursue the matter in furtherance of their demands. Regarding functional Directors, provisions are made in the Share Purchase Agreement that they shall be deemed to be nominees of the buyer. However, the buyer has been given an option to remove them. But, in that case, they may be given a notice of six months or pay in lieu thereof. The Government of India may also take steps to relocate them in case of Strategic Partner not retaining them. In any case, functional Directors are contractual appointees and after termination of the contract, they are entitled to terminal benefits, leave encashment, gratuity etc. as per the rules of the company. Provisions in the Shareholders' Agreement Shareholders' Agreement generally incorporates the concerns of the Government regarding employee protection. Normally, the following clauses are kept in the Shareholders' Agreement: 1. The parties envision that all employees of the company on the date hereof shall continue in the employment of the company. (If there are surpluses, the Government tries to give VRS/VSS before disinvestment). 2. The Company shall not retrench any part of its labour force for a stipulated period from the closing date other than any dismissal or termination of employees of the Company from their employment in accordance with the applicable staff regulations and standing orders of the Company or applicable Law. 3. Typically the agreements include a recital stating that the strategic partner recognizes that the Government in relation to its employment policies follows certain principles for the benefit of the members of the Scheduled Caste/Scheduled Tribes, Physically Handicapped persons and other socially disadvantaged sections of the society and that the strategic partner shall use its best efforts to cause the company to provide adequate job opportunities for such persons. Further, in the event of any reduction in the strength of the employees of the company, the strategic partner shall use its efforts to ensure that the physically handicapped persons are retrenched at the end. 4. Subject to the above Clauses, any restructuring of the labour force of the Company shall be implemented in the manner recommended by the Board and in accordance with all applicable laws. The strategic partner in the event of any reduction of the strength of its employees shall, ensure that the Company offers its employees an option to voluntarily retire on terms that are to, in any manner, less favourable than the voluntary retirement scheme offered by the Company on the date of the agreement.