The Telegraph
Tuesday , January 7 , 2014
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Audit heat on telecom players

Mumbai, Jan. 6: Private telecom companies in India suffered a major setback today when the Delhi high court said the government’s auditor could pore over their accounts.

The Comptroller and Auditor General (CAG) has been permitted to call for all books and material from private telecom companies to audit their accounts for a period of three years, starting 2006-07, in order to assess the government’s share of the revenues they earned.

Under the terms of the licences issued to them, the telecom companies are required to share a small percentage — between 3 and 8 per cent — of their adjusted gross revenues with the government.

But the court said it would be a narrow audit.

A two-judge bench, comprising justices Pradeep Nandrajog and V. Kameswar Rao, said the CAG’s audit of the private telecom companies’ accounts would only pertain “to receipts and no more”.

Issuing a small caveat, the judges specifically barred the government auditor from going on another fishing expedition and asked it not to conduct “inquiries into aspects like faithfulness, wisdom and economy in expenditures”.

The telecom companies and the two industry associations that represent them — the Cellular Operators Association of India (COAI) and the Association of Unified Telecom Service Providers (Auspi) — have consistently argued that the CAG can’t audit private companies.

The telecom companies are likely to challenge the verdict in the Supreme Court.

“We believe the CAG was constituted to be answerable to Parliament in respect of businesses which are owned by the government. There is no place for CAG interfering in a private company’s books,” Ficci president Sidharth Birla said.

The prospect of CAG auditing the books of private companies has incensed India Inc in the past year.

Reliance Industries tried to stonewall a CAG audit of its books relating to the Krishna Godavari offshore gas fields where production had fallen alarmingly in the past two years. The company blamed the production shortfall on geological complexities in the deepwater field but the petroleum ministry demanded a CAG audit when the government’s revenues tumbled. It snowballed into a major battle with Reliance agreeing to a narrow audit and the CAG refusing to let a private player set the boundaries to the scope of its audit.

Earlier this month, Delhi’s new chief minister Arvind Kejriwal had ordered a CAG audit of the power distribution companies operating in Delhi on the suspicion that some of them might be fudging their expenditure to be able to charge a higher power tariff. The rate is fixed by an independent regulator but Kejriwal believes that cost padding by the power distribution companies has led to the sharp rise in Delhi’s power rates. Kejriwal has decided to extend a power subsidy to poor and middle-class consumers in the capital until the outcome of the CAG audit is available.

The telecom companies have argued that they do not come within the purview of Article 149 of the Constitution, which empowers the CAG to audit the accounts of the Union government and the states as also authorities or bodies established under any law made by Parliament.

The private companies argued they were covered by the company law that permits audits by independent chartered accountants.

But the high court judges said private companies could no longer hide behind the company law and its provisions. It said there was a deficiency in the company law in regulating corporate enterprises since it fostered an environment where the affairs of the company were “treated as affairs concerning the shareholders and the directors (as agents of the company) are answerable only to the shareholders”.

The judges also blamed the political class for some of the ills of poor regulatory oversight. “One ill of a democratic system is partisan majoritarian politics resulting in partisan political control. Policies tend to be determined by party strife and partisan political control. The governing elite ensured lack of transparency about institutional arrangements,” the judges said.

They said this had led to a sort of a “club government”, borrowing a phrase used by author Marquand D. in his book The Unprincipled Society: New Demands and Old Politics. The three striking features of a club government were informality, insider knowledge and screening from public scrutiny and accountability, the judges said.

The court said liberalisation and privatisation had to redefine the boundaries between the public and the private. The new regulatory state had to “reconstruct institutions on the ruins of the club government”.

“The expansion of audit into ambitious systems of surveillance are, therefore, not unexpected consequences of the development of the new regulatory state. They are central to its existence because they are the key response to the ruins of club governance,” the judges said.

The judges said regulation had led to a kind of adversarial relationship between the regulators and corporate entities. “The result is that, in critical areas of regulation, a battle of wits is constantly fought between the regulators and the regulated, intent on evading compliance all together or in producing only creative compliance,” they added.