The Telegraph Act 1885 gives the central government exclusive privilege to grant telegraph licences to any person for the establishment, maintenance or operation of a telegraph in any part of India, on such conditions as it thinks fit. The National Telecom Policy issued in 1994 was the first major step towards the deregularisation, liberalisation and privatisation of basic telecommunications services, making them available at affordable prices to the public. Furthermore, under the 1999 National Telecom Policy, licences were granted to mobile telephone service operators in various cities and circles. The Telecommunications Regulatory Authority of India (TRAI) Act was enacted in 1997, entrusting the TRAI with a number of regulatory functions on unified licensing.
Accordingly, the Department of Telecommunications entered into licence agreements with various service providers, granting them unified access service licences. The licence agreements provided for revenue sharing between the service providers and the government. Under Clause 22 of the licence agreement, the department (ie, the licensor therein) and/or the TRAI has the right to call for or examine any of the service providers' accounts books at any time without assigning any reason thereto, and the service provider is obliged to supply the same. Under Clauses 22.5 and 22.6 of the licence agreement, the department has the power to carry out audits and special audits of the service providers' accounts.
Delhi High Court ruling
On January 28 2010 the TRAI issued a communication to one of its service providers requesting that it provide accounts books to the comptroller and auditor general under Rule 5 of the TRAI Service Providers (Maintenance of Books of Accounts and other Documents) Rules 2002. The service providers filed a writ petition challenging the TRAI's communication on the grounds that it violated Section 16 of the Comptroller and Auditor General's (Duties, Powers and Conditions of Service) Act 1971 and Article 149 of the 1950 Constitution.
A division bench of the Delhi High Court took the view that the comptroller and auditor general has the power to conduct an audit of all accounts drawn by the service providers. While dismissing the writ petition, the court expressed the view that the accounts of the licensee in relation to revenue receipts can be said to be accounts of the government and are thus subject to a revenue audit under Section 16 of the 1971 act.
The service providers appealed the ruling before the Supreme Court by way of a special leave petition.
On March 16 2010 the Department of Telecommunications issued a communication to one of its service providers calling on the service provider to submit accounting records for inspection by the comptroller and auditor general under Clause 22.3 of the Unified Access Service Licence. The service providers challenged the department's communication before the Telecoms Disputes Settlement and Appellate Tribunal (TDSAT) on the grounds that the communication went beyond the scope of the licence agreement.
The TDSAT held that an audit was permissible under Clause 22.5 of the licence agreement only if the department was of the opinion that the accounts submitted by the service providers were inaccurate and/or misleading. Since this was not the case, the TDSAT quashed the department's communication.
The department appealed the TDSAT's order before the Supreme Court.
The appeals arising out of the rulings by the Delhi High Court and the TDSAT were heard together by the Supreme Court.
The Supreme Court was required to consider whether the comptroller and auditor general is competent to conduct an audit of the accounts of private companies under Section 16 of the Comptroller and Auditor General Act, read with Rule 5(ii) of the TRAI Rules.
The main arguments put forward on behalf of the service providers were as follows:
- The comptroller and auditor general's jurisdiction does not extend to the service providers, as they are not government companies and receive no government funding.
- The term 'body' found in the phrase "accounts of the Union and States and any other authority or body" of Article 149 of the Constitution should be construed in light of the continuing terms 'union', 'states' and 'authority'. The term 'any other authority or body' is meant to cover only entities that cover state functions or entities financed or controlled by the state, not other corporations.
- Section 16 of the Comptroller and Auditor General Act does not apply to audits of the service providers and the mere fact that a licence fee payable under the licence agreement must be credited into the Consolidated Fund of India does not mean that a proprietary audit in respect of such receipts extends to a statutory audit of the service providers.
- The licence agreement issued under Clause 22 already provides for audit by the Department of Telecommunications and/or the TRAI, as well as a special audit.
- Rule 5 of the TRAI Rules should be struck down as ultra vires and in contravention of Section 16 of the Comptroller and Auditor General Act.
In turn, the government argued as follows:
- The powers under Article 149 of the Constitution are not limited to the accounts of the union and the states, but include the powers to legislate on all matters concerning the accounts of the union. The purpose of Article 149 and the Comptroller and Auditor General Act is to provide for parliamentary control of executives of public funds. Therefore, the ambit of audits by the comptroller and auditor general must cover all issues that are required to be examined by Parliament.
- The phrase "receipts payable into the Consolidated Fund of India" in Article 266 of the Constitution encompasses "all revenue receipts received by the Government of India" and a reading of Sections 13, 16 and 18 of the Comptroller and Auditor General Act indicates that the comptroller and auditor general must audit all transactions entered into by the union and the states pertaining to the fund.
The Supreme Court held that while dealing with a natural resource such as spectrum, the quantum of revenue generated out of the use of the natural resource – whether the same has been properly assessed, collected and accounted for by the government and the service providers – must be ascertained.
The court held that on a reading of Sections 13 and 16 of the Comptroller and Auditor General Act, the expression "audit of all receipts" payable into the Consolidated Fund of India should take into account not only the accounts of the union, states or any other body or authority, but all transactions into which the union or state have entered that have a direct nexus with the fund. Since the amounts paid by the service providers under the licence agreements would be received by the fund, the comptroller and auditor general is empowered under Article 149 of the Constitution to audit the accounts of such service providers.
The Supreme Court held that in this process the comptroller and auditor general is not auditing the accounts of the service providers, but is examining the receipts to ascertain whether the government is receiving its due share by way of revenue sharing. Further, an audit by the comptroller and auditor general is independent of the audit mechanism under the licence agreement.
The Supreme Court thus dismissed the service providers' appeal and upheld the power of the comptroller and auditor general to examine the accounts of private entities.
The judgment, like many others in recent times, mirrors the sentiment of the general public. The 1990s saw a wave of liberalisation ensuring that private enterprise flourished in a more open environment with less policing than previously seen. Over the subsequent decades, private businesses have struck gold (in the perception of many) at the expense of the masses. In public-private partnerships concerning natural resources, this perception has been heightened. It is felt – and, to an extent, rightly so – that unscrupulous businessmen acted hand-in-glove with the executive to strip the country of its natural resources at the expense of the public (actions that are often described as crony capitalism). There is a thin line between capitalism and crony capitalism. However, the latter is arguably the outcome of a failure in corporate governance and can therefore result in judicial activism, where the courts step in to correct any imbalance in the system.
The Supreme Court judgment appears largely to agree with the above view. The court made it clear that the system embodies the ever-pervasive nexus between private parties and the executive. Private enterprise may shudder at the thought of having a prying eye look at its accounts – a move many would consider a step backward, harking back to the era of regulation. However, a close look at the decision reveals that such fears may be unfounded.
Undoubtedly, the judgment will have far-reaching consequences, cutting across various sectors. It affects every public-private partnership project – whether roads or highways, oil and gas, power or other infrastructure projects. Pertinently, while the judgment empowered the comptroller and auditor general to audit the accounts of private companies, it did not mandate that the comptroller and auditor general is obliged to do so in every public-private partnership.
Moreover, the judgment held that that comptroller and auditor general can look into accounts of private companies only for the limited purpose of ascertaining whether the government is receiving its fair share under the revenue-sharing model, not for the purposes of conducting a wider audit.
When passing judgment, the Supreme Court was mindful of the need for greater transparency in the manner in which private players deal with natural resources and compensate the exchequer for such resources. At the same time, the court added a cautionary note that the powers to be exercised by the comptroller and auditor general do not include carrying out a statutory audit of service providers' accounts, but are limited to ascertaining whether the union is getting its legitimate share by way of revenue sharing.
As a result of the ruling, a tug of war between private enterprise and comptroller and auditor general may be expected. However, only time will tell whether the comptroller and auditor general adheres to the Supreme Court's observations and acts within the scope and parameters set out in the judgment.
For further information on this topic please contact Naresh Thacker or Rhia Marshall Banerjee at Economic Laws Practice by telephone (+91 22 6636 7000), fax (+91 22 6636 7172) or email (firstname.lastname@example.org or email@example.com).