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Apex court allows CAG audit of private telcos
April, 18th 2014

The Supreme Court on Thursday held that the Comptroller and Auditor General (CAG) could audit the account books of private telecom companies, which share their revenues with the government for using spectrum. The Court said such a scrutiny was crucial for ensuring the government got its “legitimate share” for allowing private telecom operators to use the valuable natural resource.

Though the Supreme Court’s present order is for the telecom sector, it is believed to also have an implication for other industries like power, mining, roadways, ports and airports, in which private companies either share revenues with the government or partner it under the public-private partnership (PPP) model. According to experts, such projects, too, could come under CAG’s scrutiny.

A Bench of judges K S Radhakrishnan and Vikramajit Sen passed the order on Thursday after hearing a batch of petitions filed by the two telecom industry bodies — Association of Unified Telecom Service Providers of India (Auspi) and Cellular Operators Association of India (COAI). These associations had filed petitions challenging the Delhi High Court’s January order allowing CAG to examine the account books of private telecom companies under the Telecom Regulatory Authority of India (Trai) Act.

The judgment said “as natural resources are public goods, the doctrine of equality, which emerges from the concepts of justice and fairness, must guide the State in determining the actual mechanism for distribution of natural resources.”

It added: “We are of the considered view that when the executive deals with the natural resources, like spectrum, which belongs to the people of this country, Parliament should know how the nation’s wealth has been dealt with by the executive and even by the UAS (unified access spectrum) licence holders and the quantum of the revenue generated out of the use of the spectrum and whether the same has been properly assessed, collected and accounted for by the Union and the UAS licence holders. 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 Parliament. Parliamentary democracy also envisages, inter alia, the accountability of the council of ministers to the legislature.”

“While dealing with a natural resource belonging to the people of this country, the court has to give a purposive interpretation to Article 149 of the Constitution and the Trai rules,” the 75-page judgment said. Article 149 of the Constitution deals with the “duties and powers of CAG”.

The Supreme Court order, however, raised concerns across broad swathes of the industry. “The judgment is likely to add to the complexity of telcos’ operating environment. This ruling would add to the perception that India is a difficult country to do business in and there is more government than warranted. It (the scrutiny) could be extended to mining, power, airline, banking, manufacturing, services companies and individuals, too,” said Hemant Joshi, partner, Deloitte Haskins & Sells.

Companies in PPP projects or with a revenue-sharing model with the government might come under scanner, he added.

Vinayak Chatterji, chairman of infrastructure advisory firm Feedbak Ventures, argued: “As far as the financial books of private companies go, that should not be the playground for CAG. There are processes for periodic inspection across various infrastructure sectors... CAG should look at the processes and the nature of policy. So far as audit of books is concerned, it should be left to statutory auditors.”

A senior executive of a private infrastructure firm agreed: “This move could put restrictions on private business in the country. The government needs to bring a mechanism to ensure private companies do not come under CAG’s purview. There already are too many layers of framework; this is an additional constraint.” According to a senior executive with a leading metro project, “already, private parties have little interest in infrastructure projects. The possibility of a CAG audit will make them more defensive and averse to risk-taking”.

In 2010, telecom companies had moved the Delhi High Court against a decision of the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) on the issue. The Supreme Court had on February 3 sought responses from the Centre and CAG on the pleas of the telecom associations.

The main argument of Auspi and COAI was that the companies had no revenue-sharing agreement with the government and what they were paying was as licence fee. The government, on its part, contended that the firms were functioning under specific terms of telecom laws and notifications. Also, it argued, the government’s revenue share was linked to telecom companies’ profits.

Asked about the Court order, COAI Director-General Rajan Mathews said: “The order restricts CAG audits only to the revenue-sharing part. Telecom companies, being audited four times now, are already under stress. This will only increase the burden. With the SC order, companies across sectors with a revenue-sharing model with the government would come under CAG audits.”. He, however, also said the new government might bring some good news for the telecom industry. “The new government may bring a new legislation as a breather for the industry.”

Auspi Secretary-General Ashok Sud echoed the same concerns. “This will have huge implication across industries. CAG will now look into all companies that contribute to the government exchequer, even those without any government shareholding.”

Earlier, the telecom firms had pleaded before the Supreme Court that the Delhi High Court had erred in holding CAG empowered to conduct their revenue audits.

The controversial issue had first come to the fore in 2009, when the Department of Telecommunications (DoT) had hired CAG-empanelled auditors to audit the books of Bharti Airtel, Vodafone India, Idea Cellular, Tata Teleservices and Reliance Communications for the financial years 2006-07 and 2007-08. Audits for these years had indicated the telecom operators were underpaying for spectrum and telecom permits by underreporting revenues.

Telecom operators pay six-10 per cent of their annual revenues as licence fee, besides two-three per cent as spectrum usage charges. Telecom companies had argued they had not included “non-telecom revenues” in calculating licence fees.

Following the audit, DoT had issued notices to recover about Rs 1,600 crore in unpaid dues from the five telcos in June 2012. The telecom companies, which have been opposing this in courts, argue the revenues not accounted for were not from their telecom business directly but from allied verticals, so these should not be counted.

Even before the Supreme Court order, CAG had started scrutinising the accounts of private companies in crucial infrastructure sectors. For instance, the 49-day Aam Admi Party government in Delhi had asked CAG to audit the accounts of three private power distribution companies supplying electricity in the capital. When the companies refused to share information and moved the Delhi High Court against the order, they were asked to comply and cooperate with CAG. In the case of airports, CAG has audited the books of Delhi International Airport Ltd, a joint venture between GMR and the Airport Authority of India, and claimed the government lost revenue in leasing land to the company.

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