[Judgement] Comptroller & Auditor General (CAG)’s right to audit private companies

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  1. Sequence of Events
  2. Supreme court ruled following:
  3. Anti-Arguments
  4. Private sector’s CAG audit in past

Sequence of Events

  1. Telecom companies have to share some part of their annual revenue with government: 6-10% as license fees and 2-3% as spectrum usage charges.
  2. 2009, the department of telecommunications (DoT) ordered private auditors to check the account books of some telecom companies. These private auditors were selected by CAG.
  3. They found some telecom companies had under-reported revenues, to pay less license fees and spectrum fees to government of India.
  4. June 2012: DoT issued notice to Airtel, Vodafone, Reliance and Tata to pay ~1600 crores.
  5. Telecom companies went to TDSAT (the Telecom Disputes Settlement and Appellate Tribunal) but defeated.
  6. They went to SC,but SC directed them to approach Delhi HC first
  7. Jan 2014: Delhi HC says DoT is right. CAG can audit such companies.
  8. Companies goto SC again
  9. April 2014: SC says Delhi HC is right = DoT is right.

Supreme court ruled following:

  1. Natural resources (such as spectrum) belong to people. Whenever Union, State, Local bodies or private entities are exploiting natural resources => they’re accountable to people and to the Parliament.
  2. In Natural resources, there is proliferation of PPP agreements, Revenue sharing agreements- be it spectrum, oil, gas or mining. Therefore public interest is involved.
  3. CAG is not carrying out this audit under Companies act.
  4. CAG has to merely check whether companies paid the legitimate revenue share to government or not? whether they paid their due share in licence fee and spectrum charges or not?
  5. Because every unlawful gain by company is a loss to Consolidated fund of India.
  6. Therefore, CAG has right to audit money trails that come to Consolidated Fund of India.
  7. Ordered Vodafone and Airtel to submit all account records to CAG.

– Justice K S Radhakrishnan and Justice Vikramajit Sen.

Anti-Arguments

Made by Corporate lawyers and right wing columnists:

  1. We’ve not underreported anything. Licenses fees = 6 to 10% (telecome revenue). But these CAG empanelled auditors give logic that License fees = 6 to 10% (total telecom revenue, even that coming from non-telecom revenue!) Hence they’re wrongfully blaming us.
  2. We’re are not public sector undertakings (PSUs). We cannot be audited by CAG. At max, our account books can be examined by shareholders under Companies Act, and IT department under IT act.
  3. Art.149 says CAG can audit accounts of union and states and of any other authority or body as prescribed under the any law made by parliament. But parliament has made no such law to audit private telecom companies by CAG. So DoT’s executive decision is invalid.
  4. SC’s logic is every penny that comes to Consolidated fund of India, needs to be audited. So on that logic, every company, every tax payer will fall under CAG audit.
  5. By SC’s logic, every company/individual engaged in natural resources will be subjected to CAG audit- be it mining, power, oil-n-gas, highway, ports, television or internet service providers.
  6. Companies already face multiple audits by multiple agencies (DoT, TRAI, CCI, FMC, Sebi and now CAG).
  7. Companies will need to spend additional money on staff and record keeping. It’ll hurt profit margins.
  8. Among foreign investors, there is already negative perception that India has “too many” rules and regulation, hence not a good country for “doing business”. This new ruling will add to that negative perception, will decrease the incoming FDI/FII.
  9. In previous cases, Court already permitted CAG to audit electricity distribution companies (Kejri) and GMR airport development. With this new verdict, CAG will get ‘jurisdiction inflation’ i.e. an institution is given powers to acquire more powers. Not good for balance of powers and economy.
  10. Because of CAG activism, IAS officers avoid taking decisions altogether. Similarly CAG will make top business executives risk-avoiders. Then Company can never grow.

Private sector’s CAG audit in past

Timeline of Events
PowerDelhi HC permitted CAG to audit electricity distribution companies.
RoadsNot yet. And now government also stopped giving highway PPP projects.
PortsPrivate port owners have to share revenue with government. But CAG hasnot yet audited.
Oil and GasYes, doing audit of Reliance KG-D6 basin.
Aviation2005: PPP project for Delhi airport development. CAG found government gave this PPP project at throwaway prices to GMR. Leading to loss of ~1.6 lakh crore.
SpectrumCAG found that Raja is totally awesome.

Mock question (GS2)

What is the audit jurisdiction of CAG under Art 149? How is it expended by recent SC verdict on telecom companies? (200 words)

Original provisions

Art 149 of the Constitution empowers CAG to audit the accounts of Union, States and other bodies as prescribed by any law of parliament. Accordingly, CAG audits following accounts:

  1. Consolidated funds of Union, States and UT with legislative assemblies
  2. Contingency and Public Accounts of Union and States
  3. Departmental undertakings, Government companies and other bodies financed by Union or State.

Expansion under SC verdict

  • For spectrum usage, telecom companies have to share part of their annual revenue with government as license fees and spectrum usage fees.
  • But in 2009, CAG empaneled private auditors found some telecom companies have been under-reporting their annual revenue to pay less fees to government.
  • DoT ordered those companies to cough up the money but Case went to TRAI, TDSAT, Delhi HC and finally Supreme court of India

The SC verdict has expended the scope of Art.149 in following manner:

  1. Natural resources such as spectrum, oil, gas and minerals- belong to people.
  2. Whenever Union, State, Local bodies or private entities are exploiting natural resources, they’re accountable to people via Parliament.
  3. Although CAG doesn’t have powers to audit any private sector companies under Companies act.
  4. But when private sector is exploiting natural resources under PPP or revenue sharing agreements, every unlawful gain by company is a loss to consolidated fund of India.
  5. Therefore, CAG has right to audit the receipts of private sector companies that share revenue with the government for use of spectrum.

~240 words

Visit Mrunal.org/Polity for entire Archive of Polity articles published so far.

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