COVID-19 and the Bharat Stage VI rollout- the Balancing Act?

In recent times, the automobile industry in India has probably witnessed its worst slump, starting with the ban on sale of large engine capacity diesel vehicles and thereafter the switch to Bharat Stage (‘BS’) VI standards straight from BS-IV or Euro IV with effect from April 1, 2020.

From the perspective of the automobile industry, there could not have been any worse time for the COVID-19 pandemic to hit India. Owing the current situation, the industry has been severely impacted with no sales and complete lock down of vehicle registration offices.

Background

By Order dated October 24, 2018 [1], the Supreme Court of India in exercise of its powers under Article 142 of the Constitution of India [2] prohibited sale or registration of any motor vehicle conforming to the emission standard BS­IV with effect from April 1, 2020.

It was noted that:

• There was sufficient time for the manufacturers to change over to BS-VI emission norms.

• Government has been pro­active in spending huge amounts of money to move to the BS­VI technology and investing huge sums to ensure fuel available in the country is BS-VI compliant.

• If there is a conflict between health and wealth, health will have to be given precedence.

One would think that a period of one and a half years is sufficient to change over to the new technology, especially if that technology has been developed by manufacturers.

However, at ground level, this period could indeed be insufficient considering the following illustrative aspects:

• This transition is extremely capital intensive and requires significant capital to be invested for integrating new emission control and engine technologies;

• Earlier BS-VI fuel was to be introduced with effect from 01 April 2024, which was preponed to 01 April 2023 and it was then preponed to 01 April 2021 and finally the date was advanced to 01 April 2020;

• It was decided to leapfrog from BS-IV fuel to BS-VI fuel without shifting to BS-V fuel;

• Large volume of accumulated stocks of non BS-VI compliant vehicles coupled with a crisis in the automobile sector.

COVID-19 has further presented an unprecedented situation in terms of seeking relief from Courts, continuity of business as well as health of citizens.

The Issue

In October 2018, the Society of Indian Automobile Manufacturers (SIAM) sought to canvass before the Supreme Court that, the shift to BS-VI compliant vehicles is a long drawn out process requiring huge changes in technology and therefore, manufacturers would face difficulties if the deadline for sale of non BS-VI vehicles is not extended.

The Supreme Court, however, contrasted the positive effects of BS-VI fuel on the environment with the already cascading effect of pollution on environment and health.

The automobile manufacturers were thus required to utilize the year and a half leading up to April 1, 2020 to gradually phase into BS-VI compliant vehicles by starting the production and sale of BS-VI compliant vehicles much in advance.

Accordingly, in a conflict between health and commercial interests, the Supreme Court made a conscious decision to give precedence to the health of the citizens. The reason for this is not far to seek. The air pollution in the country over the years has been severely affecting the health of the citizens.

COVID-19- the reaction

The one and a half year timeline needs emphasis since some manufacturers admittedly developed superior technology at the material time. Manufacturers were thence required to channelize all their resources in selling the accumulated BS-IV stock.

Towards the last quarter of the aforesaid period, COVID-19, the pandemic struck, bringing the world to scathing halt. The State was constrained to declare a nationwide lockdown for 21 days starting March 25, 2020 in order to control the spread of the pandemic.

The lockdown came at a very crucial time when the automobile manufacturers and dealers were in their last phase of trying to sell off the remaining BS-IV stock. With the sales dropping to almost zero in light of the lockdown, they were left with significant unsold BS-IV inventory, which possibly could not have been cleared out by March 31, 2020.

Owing to the lockdown, the automobile dealers and manufacturers would have missed out on some important days during the peak season of sales of their BS-IV vehicles. As such, even if there was some hope to reinvent the wheel of the automobile sector, COVID-19 brought the wheels to a screeching halt. Depleting demand, a looming deadline and COVID-19 left only a moment for the stakeholders to react.

In view of the events as they unfolded, the automobile dealers and manufacturers moved urgent petitions before the Supreme Court of India seeking some relaxation on the 31 March 2020 deadline.

Decision to overcome

The October 24, 2018 Order passed by the Supreme Court left no scope for leniency particularly when the fundamental right to life enshrined under Article 21 of the Constitution was involved. But, when a pandemic like COVID-19 struck which is making the world stare at a possible recession, was it time to request the Court for some leniency?

Accordingly, the Federation of Automobile Dealers Associations (FADA), on behalf of its 25,000 members, approached the Supreme Court seeking an extension to the deadline. It is pertinent to mention that the Supreme Court had refused to entertain an earlier request for extension made by FADA in February 2020.

In their submission before the Apex Court, FADA stated that:

I) 1,05,000 two-wheelers, 2250 passenger cars and 2000 commercial vehicles have been sold but not registered throughout India

ii) 7,00,000 two-wheelers, 15,000 passenger cars and 12,000 commercial vehicles remain unsold throughout India\

Supreme Court’s balancing act

After hearing the submission made on behalf of FADA and considering the lockdown situation, the Supreme Court by its Order dated March 27, 2020, partially allowed FADA’s application seeking extension of deadline.

The Supreme Court’s Order makes a clear distinction between BS-IV sold and unsold inventory. The Court permitted the sold but unregistered vehicles to be registered by the concerned authorities by April 30, 2020. FADA was directed to furnish the details of the purchasers, on affidavit, of the said vehicles through email within 7 days.

With respect to the unsold vehicles, the Court observed that the manufacturers had sufficient time to sell the BS-IV vehicles since the deadline was known long back and there is no justification to extend the same.

However, considering the extraordinary circumstances, the Court permitted only upto 10% out of the abovementioned remaining vehicles to be sold in all parts of the country barring Delhi and NCR region within 10 days of the lifting of the lock-down.

It will be interesting to see if the respective extensions granted by the Supreme Court above, both for registration of the sold vehicles and sale of the unsold vehicles, will automatically stand extended by the respective time periods, should the lockdown extend.

FADA has been directed to furnish details such as engine and chassis numbers of the vehicles sold in terms of the Order within seven days of sale and only those vehicles shall be permitted to be registered about which the affidavit is filed.

Thus, some of the factors which may have contributed to the Supreme Court passing its Order could be, the cascading effects of COVID-19 on the overall economic health of the Country, source of livelihood of employees, which is a facet of the right to life under Article 21 of the Constitution of India and downturn of the automobile sector.

Slowdown in the automobile sector- the saga continues

DG, SIAM, in the past has stated that area of emission and environmental sustainability is extremely high on the industry’s agenda. COVID-19 has only added to the woes of the automobile industry which is already facing a rough patch. In the wake of this bumpy ride, the Supreme Court’s latest Order exhibiting some leniency should be well received by the automobile sector.

As per FADA’s estimates, the value of the unsold inventory lying with the dealers currently is approximately INR 7,000 crores. It now remains to be seen whether the dealers will be able to sell even the permitted quantities within the short window of ten days of lifting of the lockdown, when the country will just be recovering from a major economic slump. Even with this brief respite purchase of vehicles may not be an immediate priority after economic activities resume.

Citation-

[1] M.C. Mehta vs Union of India Writ Petition (Civil) No. 13029 of 1985

[2] 142. Enforcement of decrees and orders of Supreme Court and unless as to discovery, etc ( 1 ) The Supreme Court in the exercise of its jurisdiction may pass such decree or make such order as is necessary for doing complete justice in any cause or matter pending before it, and any decree so passed or orders so made shall be enforceable throughout the territory of India in such manner as may be prescribed by or under any law made by Parliament and, until provision in that behalf is so made, in such manner as the President may by order prescribe

The authors are Sumeet Lall (Partner), Sidhant Kapoor (Senior Associate) and Devyani Sharma (Associate), CSL Chambers

Read Order