SC confirms CAG audit requirement

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A recent Supreme Court (SC) judgement on the subject has raised eye brows and expected to have far reaching impact on investors who avail of government auctioned natural resources, in general and in particular, immediate impact on Telecom operators now expected to undergo a CAG audit.

As a background, the CAG initiated audit after TRAI alleged that some operators were under reporting the Govt’s revenue share. In response to a petition by the operators, the Delhi High Court held beyond doubt that the CAG’s  constitutional powers are wide and specifically in relation to audit of telecom companies , it held that the CAG audit has to pertain to revenues and not all aspects such as ‘ wisdom & economy in expenditures’, thereby restriction scope of audit.

The SC modifying the HC order held that it is not the statutory audit under The Companies Act or the special audit function as prescribed under the terms of the agreement between the licensor (the government via the DOT) and the licensee ( the operator), but an inherent power of the CAG as the constitutional authority under Article 149 of the constitution which comes into play.

It (SC) however caveated it’s order by saying that the CAG examination should be confined to statement of accounts for ascertaining that there is no loss to the exchequer. In coming to the conclusion, the SC didn’t agree with the operators association that the commencement of the CAG audit would depend upon ‘ the formation of opinion ‘ by the Government or DOT that the statement of accounts submitted by it ( operators) are inaccurate or misleading. The SC distinguished the power of the Government derived from the  licensing agreement and the power of the CAG as an independent constitutional authority.

To buttress its opinion, the SC relied upon established jurisprudence as to the importance of natural resources, in general and in particular, the spectrum as a finite resource being scarce – belonging to the people of the country etc. The orbiter sounded similar to the earlier judgements of the SC in the case of 2G and Reliance natural gas matter.

A plain reading of the judgement reveals that it shall have far reaching impact and it’s consequences could be wide encompassing all forms of natural resources such as mining, hydro carbons etc. and spread across a wider range of industries including airlines, roads etc.

While businesses would grapple with this judgement, to me it seems that the SC in coming to the conclusion on the telecom matter merely interpreted the agreement between the licensee and licensor and hence has limited impact. It’s orbiter ideally should not impact all forms of auction able natural resources. However, this judgement seems to give wider empowerment to the CAG to perform such audit on private or public or PPP models.

What is possible is an outcome similar to the 2G verdict wherein the orbiter of the SC suggested that the Government shall have to pursue an auction policy for all forms of  natural resources irrespective of executive powers. Thank fully, in a Presidential reference made by the Government, this aspect was clarified. I feel that a similar situation has arisen and the recent judgement needs clarity insofar as it’s reach is concerned to avoid unintended consequences.


Mukesh Butani

( Views are personal)

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