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India Inc. 'CAG'ed! Telecom & Who Else?

Published on Sat, Apr 19,2014 | 18:15, Updated at Mon, Apr 21 at 10:21Source : CNBC-TV18 |   Watch Video :

This week the Supreme Court said that it is the duty of the Comptroller & Auditor General of India to audit all transactions of the Union & State as also to audit all receipts payable to the Consolidated Fund of India. And hence the apex court ruled that CAG's examination of the accounts of private telecom service providers in a revenue sharing contract is extremely important to ascertain whether there is an unlawful gain to the service provider and an unlawful to loss to the Union. Is it just telecom companies that can now be audited by CAG or does the application of this judgment extend to all situations where the government has a revenue share? To discuss the scope & enforcement of this order, CNBC-TV18’s Menaka Doshi speaks to Rajeev Uberoi, Group General Counsel & Group Head - Legal & Compliance, IDFC and Vikram Nankani of ELP



Supreme Court: 17th April, 2014


CAG Act, 1971

Sec 13. It shall be the duty of the Comptroller and Auditor General –

(b) to audit all transactions of the Union and of the State relating to Contingency Funds and Public Accounts; 

SC: ‘transaction’ - an expression of widest amplitude and would cover even the lease agreement entered into by the Union with service providers.



Supreme Court: 17th April, 2014

CAG Act, 1971

Sec 16. It shall be the duty of the Comptroller and Auditor-General to audit all receipts which are payable into the Consolidated Fund of India and of

each State and of each Union Territory… 

SC: ‘receipts’ - evidently includes income of the nation received by the DoT…on a revenue sharing basis…



Supreme Court: 17th April, 2014 ‘CAG’s examination of the accounts of the Service Providers in a Revenue Sharing Contract is extremely important to ascertain whether there is an unlawful gain to the Service Provider and an unlawful loss to the Union of India, because the revenue generated out of that has to be credited to the Consolidated Fund of India.’


Doshi: Does this apply only to telecom companies or will this apply to a wide variety of public-private partnership projects or any other business that has any form of revenue share with the government, what do you say Mr Uberoi?

Uberoi: Any kind of revenue which is coming to the state through any contractual obligation of any concession is subject to the review of CAG.

Doshi: That’s a very wide impact Vikram, do you read it as Mr Uberoi reads it, that’s one question and if you can, in you answer also tell me whether there needs to be the involvement of a natural resource and the reason I ask this is because the front part of the Supreme Court order dwells in great detail on how spectrum is a natural resource and therefore, the distribution of this natural resource in a manner which benefits the public is what the Constitution requires. So, does there have to be a natural resource nexus?



Supreme Court: 17th April, 2014


‘When nation’s wealth, like spectrum, is being dealt with either by the Union, State or its instrumentalities or even the private parties, like

service providers, they are accountable to the people and to the Parliament.’ 

‘Parliament has an obligation to ascertain whether the entire receipts by way of licence fee, spectrum charges, have been realized by the Union of India and credited to the Consolidated Fund of India (CFI).’



Supreme Court: 17th April, 2014


‘CAG has, therefore, a duty to examine and satisfy himself that all the rules and procedures in that behalf are being met not only by the Union but also the service providers as a whole, since both, the Union, as well as the service providers, are dealing with the natural resources.’


Nankani: I agree with Rajeev that it is actually cases where there are any receipts to the Union government or the State government that will come under the purview of the Supreme Court order because remember, they were looking at Section 16 of the CAG Act which empowers the CAG to look into the accounts of the Union, whether receipts. So, as long as there are receipts into the Consolidated Fund of India, coming from any sector, they maybe either under a concession agreement or under a BOOT (Build-own-operate-transfer) policy or any form of licensing arrangement, that would be subject to CAG as per the Supreme Court order.

Coming to the second part of your question- whether this will impact only those cases where there are natural resources or not? According to me no; that is an overarching consideration of course in the order because it says that we are dealing with spectrum which is a natural resource. But, that’s not the limiting factor of the judgment. So, it could apply even to cases where there are non- natural resources like a road concession because, again to remind ourselves, Section 16 does not limit only to natural resources or national resources. Section 16 talks of receipts to the Union and that’s unqualified. Now, if you strictly, apply the Supreme Court judgment it will apply regardless of what the resources that we are dealing with.

Doshi: If you are a business that’s in business with the government, you can be audited by CAG, is that way a fair way to look at it?

Uberoi: The common understanding which all of us had was that if you are government, you are subject to a CAG audit and if you were a government company, more than 51 percent shares held by the government, then you were subject to CAG audit otherwise you are not. But having said that this order takes credence on Article 266 also which basically says that if there is any revenue receipt coming to the Consolidated Fund of India then the CAG getting its power under Article 148 read with Section 16 of the CAG Act will be subject to the audit.




 Article 266. (1) Subject to the provisions of article 267 and to the provisions of this Chapter with respect to the assignment of the whole or part of the net proceeds of certain taxes and duties to States, all revenues received by the Government of India, all loans raised by that Government by the issue of treasury bills, loans or ways and means advances and all moneys received by that Government in repayment of loans shall form one consolidated fund to be entitled “the Consolidated Fund of India”…


Doshi: I want to add one nuance to that and which is that in one place the Supreme Court says, the scope is to audit all transactions which the Union and State have entered into, which has a nexus with the Consolidated Fund of India, especially when the receipts have direct connection with the revenue sharing. Now, when they say nexus with Consolidated Fund of India, revenue share is one thing but nexus with Consolidated Fund of India can even go beyond revenue share?



Supreme Court: 17th April, 2014


‘…to audit all transactions which Union and State have entered into which has a nexus with Consolidated Fund, especially when the receipts have direct connection with Revenue Sharing.’


Uberoi: To read that word nexus and try to let our imagination go…. (Interrupted)

Doshi: So, you are saying that this is applicable only when it comes to revenue share?

Uberoi: That’s right.

Nankani: I would read it in a wider sense.

Doshi: What all gets included then which goes beyond the logic of auditing a situation where telecom has revenue share or a road concession or something like that?

Nankani: Let’s say contractual payments to the government of India. Now, there are formulas in many concession agreements, how do you calculate the government’s share of profits, you may call it profits but still it’s a receipt in the hands of the government- that would also be subjected to CAG if this was to strictly apply. So, I don’t read it narrowly. This has opened up a wider gate for the industry to be concerned about. Unfortunately, there is no line drawn as to where the CAG can say that this is where the power extends because the moment you are talking about receipts, you are going to get into the backend calculations of how those receipts are fairly arrived at.

Doshi: I am not sure if it’s as open-ended as that because again I will refer back to what the order says and I will ask you both the question then does this judgment seek to limit the scope of an audit by saying that CAG in that process of auditing is not actually auditing the accounts of the services providers as such but examining all the receipts to ascertaining whether the Union is getting its due share by way of licence fee, spectrum charges, which it is legitimately entitled to. By adopting that process, the CAG is not carrying out any statutory audit of the accounts of the service providers, but for the limited purpose of ascertaining whether the Union is getting its legitimate share. Is that not, then, a limitation on how far the CAG audit can go?



Supreme Court: 17th April, 2014

‘CAG… is not actually auditing the accounts of the UAS Service providers as such, but examining all the receipts to ascertain whether the Union is getting its due share by way of licence fee and spectrum charges, which it is legitimately entitled to, by way of Revenue Sharing.’



Supreme Court: 17th April, 2014 

‘By adopting that process, CAG is not carrying out any statutory audit of the accounts of the service providers, but for the limited purpose of ascertaining whether the Union is getting its legitimate share by way of “Revenue Sharing”. Service providers are, therefore, bound to provide all the records and documents called for by the CAG.’


Uberoi: In every agreement, it is always embedded that the concessioner can look at the books of accounts and more so, if he is sharing the revenues.

Doshi: How far can that audit go, in the case of telecom service providers, its Adjusted Gross Revenues which need to be calculated in a certain fashion to ensure that the government is getting the right share. So, the CAG then is tasked only with ensuring that the AGR is calculated and is accounted for in the right fashion. It doesn’t go into all the other areas of the audit. Would you understand it like that?

Uberoi: I totally agree because the judgment clearly gives examples that how Compound Annual Growth Rate (CAGR) has to be calculated and to what extent it can be calculated.

Doshi: So, therefore you would see this as a limit to the scope of the audit itself. Would that be fair?

Uberoi: Absolutely.

Doshi: Vikram, do you agree?

Nankani: I am a little concerned. How would you read words like due share, legitimate share- let’s take AGR as one example but you could multiply this across sectors like oil and gas, ports and airports which Rajeev mentioned. Each of these formulas have got certain permissible deductions which are allowed, each of these formulas have an inclusive definition to say what are the elements which will go into the topline. Now, in order for the CAG to come to the conclusion that government has got its due share or legitimate share as Supreme Court puts it, they would be entitled to go into each and every element of inclusion and deduction.

Uberoi: But, already in this particular case, the Rule 3 and 5 clearly define that what kind of books you have to maintain.

Doshi: But that was in the case of telecom service providers.

Uberoi: So, in most of the concessions, it is quite well defined. But, having said that, maybe I am jumping the gun, they will have to address this issue in their forthcoming concessions, embed it down and define. You can’t have a relationship; you can’t have an agreement which is open-ended.   

Doshi: So, now concessioners, I mean private sector parties will ask saying ok, I am fine, I will subject myself to a CAG audit as the Supreme Court said. But, let’s limit what that audit is going to do and how far it is going to go. And that will become part of the agreement itself here onwards. That is for prospective agreements. What happens with all the current agreements that we have?

Uberoi: Retrospective also. In this particular case if we can take, if you look at Clause 22. 1-22.6 and 4 and 5 more in particular have clearly defined that what kind of audit has to be undertaken.

Doshi: This is the Telecom Regulatory Authority of India (TRAI) rules that you are referring.

Uberoi: Yes. It’s very clear. So, going forward if the existing concession agreements have not defined this, they can always be updated. But, going forward, the person who is bidding for it will ask certainty to what he is exposed to.

Doshi: I get that. Vikram, you don’t agree with that at all?

Nankani: I hope that Rajeev is right but I don’t share the optimism with him because I am not sure which corporate will be in that negotiating capacity and which government will be in a mood to negotiate on those lines to be more… (Interrupted)

Doshi: But they won’t get anybody to bid for any of their projects, right? Nobody will come in to bid because if you are endlessly open to several different kinds of parallel audits. You have got your own statutory audit to do, in this case the telecom service providers complained that we were already undergoing a special audit by the Department Of Telecommunications(DOT). Now, you have said that there would be parallel CAG audit; you cannot be audited three times parallelly. No company or business can survive that, right?

Nankani: I hope I am wrong. They have got a shot in the arm through the Supreme Court order whether the government would like to negotiate in this area is something to look forward to.

Doshi: Well, if the government doesn’t want to do business then the government will do what you fear. If the government wants to do business then I suppose they will do what Mr Uberoi is suggesting which is that they make it very clear in the agreement upfront what the scope of the audit will be.

Uberoi: I am optimistic because there is a due process of law – one. Secondly, the administrative law requires the government to re-visit in light of the Supreme Court judgment, not that the government did not know that the CAG can audit because the 1971 Act of CAG had that. 1997 TRAI Act provided for this and also 2002 Act provided that they can do it. It was only an issue which the business took up because of those two notices which were issued and it was raised to that extent.


TRAI, Service Providers Rules, 2002

Rule 5: Every service provider to furnish info to CAG and CAG may audit the same


Doshi: The final question I have is that why was such a big deal made of this case where all private sector companies were like ‘oh my gosh, public-private partnership (PPP) projects will now be audited by CAG; is it really such a big deal?  It’s a paper work issue; I get it. You have three audits going on it is very painful.

Uberoi: All of us knew that this is part of the agreement I have entered into, only you said that the CAG will not be there because we somewhere had in our mind that more than 51 percent if the company is owned by the government, then only it is subject to CAG. And it makes the process little more transparent, better governance. Onerous yes; and the other question which I would put is that CAG will have to tighten its belt to have the wherewithal and the expertise to do this specialized audit.

Nankani: Once you have a CAG audit objection raised, that objection is subject to challenge by the licensee or the concessioner. Given the mind set that we are in today and the larger than life role that has been now ascribed to CAG through series of decisions, not only this Supreme Court decision, I would wonder which government agency which is thereafter dealing with that objection once it has been raised by CAG will have the mindset to overturn it and who will bell the CAG and then you are going to have again a series of litigation on all these fronts. A CAG audit objection- one will find extremely difficult to get it overruled- at least at the first level where it is to be adjudicated and that is going to be a big issue with the industry. If you are going to succeed six years down the line after a full round of litigation, I don’t think that’s a matter of joy.

Doshi: The telecom companies which were anyways open to a CAG audit according their agreements with the government, by arguing this in court, have only drawn more attention to the situation and probably empowered the CAG to do more.


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