S Murlidharan

CAG can look into RIL’s KG basin accounts

S.MURLIDHARAN | Updated on March 12, 2018

The Government has a right on the gains made from transfer of oil or spectrum to a private party.

The Comptroller and Auditor General of India (CAG) is not a mere munimji (accountant), said the Supreme Court, while disposing of a PIL recently. In the process, it has upheld the CAG’s claim that he can indeed carry out a performance audit of companies coming under his remit.

But Reliance Industries Ltd (RIL) had cocked a snook at both the Supreme Court and the CAG when it said in the aftermath of the above Supreme Court verdict that the CAG can audit the KG basin accounts — provided it confines itself to the straight and narrow of accounts.

To be sure, RIL is not a public sector company. But it is into a public-private partnership (PPP) with the Government of India. Precious national resources are involved. It is time necessary amendments were brought to extend CAG’s auditing oversight into PPPs, so as to ward off any incipient challenge to his authority by those who have the gumption to question its jurisdiction first and then to ask the auditor to do audit with his hands tied, as it were.

LEGAL PROVISIONS

The CAG has rightly hit back, saying it would audit not merely the accounts, but everything impinging on the accounts. Passing a special legislation in 1971, Parliament had taken a conscious decision to extend the scope of CAG audit to include performance audit.

In the event, it is idle for Congress leaders and RIL to exhort the CAG to confine himself to receipts and payments, profit-and-loss account and balance-sheet.

Even in the absence of this explicit legislation, auditor always has had access to minutes books of the board of directors, thanks to an express provision in the Companies Act, 1956, which testifies to the fact that an auditor cannot carry out a meaningful audit unless he is privy to top-level deliberations and decisions.

While it may not be kosher for him to suggest businesses the company should or should not venture into, he is perfectly justified in looking into the appropriateness of the way the business is carried out, once such a choice has been made.

CLAW-BACK CLAUSE

When RIL sold a part of its stake in the KG basin to British Petroleum (BP) a couple of years ago for a whopping $7.5 billion, it raised many eyebrows.

The CAG is apt to examine whether there is a clause in the contract between the GoI and RIL that permits RIL to sell a part or whole of its stake. And if there is a clause, is there a claw-back clause, enabling the GoI to lay its hands on a part of the windfall gains made by RIL?

If there is no claw-back clause, the CAG in all likelihood would recommend inclusion of such a clause in future agreements where the nation’s resources are placed trustingly in the hands of a private sector company or consortium.

That BP has paid this eye-popping amount is bound to arouse suspicion on whether everything met the eye at the time of the agreement between RIL and GOI — was there more oil and gas, after all, than revealed? Absence of a claw-back clause can also arouse suspicion that there was some kind of sweet-heart deal.

LESSONS FROM 2G

Such a clause in the 2G licences would have halted the buccaneers in their tracks — the scam was after all, all about a handful of Indian companies close to the then telecom minister Raja bagging licences with spectrum thrown in for about Rs 1,700 crore on first-come-first-served (FCFS) basis and, post-haste, selling them to foreign telcos for eight to ten times without batting an eyelid.

Wasn’t it a clear case of loss of revenue to the government — profits accruing to the private players that ought to have gone into the government coffers? One was surprised to hear P. Chidambaram, also the then Finance Minister, giving a clean chit to such acts of plunder of natural resources on the ground that these corporates did not sell the telecom licences, but the shares of their companies.

Touché! Even a rookie accountant knows that in these cases, the shell companies had only one asset, that too a crown jewel — telecom licences. In the light of the lessons learnt from the 2G scam and the unfolding oil scam, the CAG ought to recommend a claw-back clause in cases of upfront sale of resources, or resources that are the underlying assets of shares that are being sold either back-to-back or sometime later.

The Supreme Court had also recently held that it is for the government of the day to decide the best mode of disposal of the country’s natural resources, but it stood by its earlier verdict that FCFS is an exemplar of crony capitalism, prone to opacity and mutual back-scratching.

Whatever the mode chosen by the government of the day, it should be amenable to microscopic examination by the CAG and, if need be, by the courts if the deal reeks of irregularity.

It would be perfectly in order if, while handing over precious resources to private parties, a moratorium period, say, five years, is written into the contract, during which period the resources/licences/shares signifying the resources cannot be sold.

And this should be followed by a tapering claw-back clause. To wit, capital gains earned during the sixth year must be coughed up 90 per cent to the Government, earned during the seventh year 80 per cent, and so on. The CAG, of course, would be at his wits’ end if the seller magnanimously agrees to pay a part of the consideration to a foreign bank account sub-rosa.

(The author is a New Delhi-based chartered accountant.)

Published on November 04, 2012

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