Guest Post: The Delhi High Court’s Decision on the CAG’s DISCOM Audit

(In this guest post, Malavika Prasad analyses the Delhi High Court’s decision on the CAG DISCOM audit issue)

The Delhi High Court held yesterday, in United Rwas Joint Action v. Union of India and ors., that the Comptroller and Auditor General cannot be entrusted with the audit of DISCOMs in Delhi, under Article 149 of the Constitution of India read with the duties laid down under the CAG Act, 1971. The allegation in the public interest petition was that DISCOMS were inflating their cost of operation by making purchases of equipment from sister companies at values above the market price, thereby profiteering from the tariffs collected from consumers. The Delhi Electricity Regulatory Commission lacked the wherewithal to check this overpricing and thus, the GNCTD’s direction to the Comptroller and Auditor General of India, to conduct audit under Article 149 read with Section 20 of the CAG Act, was valid.

The DISCOMs argued that only 49% of the shareholding in DISCOMs is in the hands of Delhi Power Corporation Ltd., a GNCTD corporation, while 51% is privately held, thus bringing DISCOMs outside the ambit of Section 20 of the Act. The GNCTD contested this view by pointing out that the functions of DISCOMs were public in nature. The counsel for the CAG questioned the claim that DISCOMS are wholly private companies, adverting to not only the monetary funding (of more than Rs.2400 crores of public money ) by the State, but also the assets of the Delhi Vidyut Board that were transferred to DISCOMs, under Section 15 of the Reforms Act. Likewise, the public-interest petitioner pointed out that distribution infrastructure was made available to DISCOMs for free, and its character as a resource of the State cannot be ignored.

Dismissing the public interest petition, the Court faulted the procedure adopted by the GNCTD, holding that Section 20 could not have been invoked without notice of the “proposal for such audit”, as envisaged by Section 20(3). The proposal ought to be more than merely the desire or intention to audit, and must contain terms and conditions of the audit, as arrived at after consultation between the Government and the CAG according to Section 20(1), and reasons that led to the satisfaction that audit was necessary (Para 47). The Court also held, in a bid to prevent the GNCTD from undertaking another similar “misguided exercise”, on merits, that the CAG audit of DISCOMs would not be consistent with Section 20(3) and in public interest:

  1. In our opinion, the question, whether it is possible for the concerned government to take any action against a body or authority on the basis of the report of CAG, under the laws otherwise applicable to such body or authority and / or under the agreement, if any of the concerned government with such body or authority, would be a relevant consideration, whether it is expedient in public interest to direct such audit or not. Needless to state that if under the law applicable and / or the agreement, the concerned government is unable to take any action against the body or authority of which audit is sought to be directed in exercise of powers under Section 20, the audit cannot be said to be expedient in public interest; after all the audit is not be an empty exercise / formality.

The Court appears to have taken this view, to prevent what they apprehend to be a colourable exercise of power by the GNCTD, to fix tariffs. This is evidenced from the Court’s conclusion that according to Transmission Corporation of Andhra Pradesh Limited Vs. Sai Renewable Power Private Limited (2011) 11 SCC 34, the scheme of the electricity regulatory statutes is to grant supremacy to Regulatory Commissions on all matters regarding tariff fixation. Regulatory powers and functions once entrusted to Regulatory Commissions, after the Reform Act, cannot be sought to be exercised by the State Governments and State Boards. The Court records:

We highlight that the CAG refused to go into the question of unbundling of DVB, with respect whereto it had already submitted a report and which had been considered by PAC. Thus, the purpose of audit was / is not whether privatisation has served any purpose or whether the terms of transfer Scheme were in the interest of GNCTD. The sole purpose / purport of audit thus is tariff determination.

Thus, since neither the Legislature nor the GNCTD had the power to reduce tariffs charged by DISCOMs, an audit by the CAG under Section 20(3) would be an empty formality. Neither the Legislature nor the GNCTD would be able to take any action against DISCOMS, even if all the allegations in the litigation are proved to be true. Therefore, a CAG audit under Section 20 would not be in public interest (Para 48-59, 68-72).

There are two problems with this view. First, it was nobody’s case that the report of the CAG will be employed towards tariff fixation, and it is undoubted that tariff fixation is within the sole preserve of the Electricity Regulatory Commissions. Second, this view of the audit as of merely instrumental worth completely ignores the inherent value of an independent audit by the CAG. The logic of Article 149 itself was to advance Parliamentary control of executive and the public funds, by placing an independent Auditor in charge of scrutiny of accounts. It appears to have escaped the Court that so long as there is public money substantially funding an enterprise, independent scrutiny and accountability of such finances is inherently in public interest. If the logic of the Court held water, then no audit under Section 20 of the Act, of an authority functioning under a regulatory framework, could ever be found to be in public interest.

The Court then goes on to hold that the powers of a DERC, to approve costs incurred by a Licensee, and even direct audit, as evident from Clause 10 of the License terms, show that DISCOMs incurring expenditure above a certain amount were already required to obtain approval of the DERC. Thus, the CAG could not possibly arrive at a different conclusion (Para 74). The Court holds:

  1. Once by law a regulatory body has been constituted with powers inter alia have the accounts of the DISCOMs audited, there can be no other audit at the instance of the State Government. Moreover the said law as well as the Regulations made thereunder and the terms and conditions on which license has been granted by the DERC to the DISCOMs are found to contain and provide the same powers, if not wider, in the DERC in relation to the accounts of DISCOMs. We are unable to decipher anything, which DERC cannot and which CAG can unearth. DERC is neither found to be helpless nor dependent on the balance sheet filed by DISCOMs.”

This view of the Court is patently erroneous, as it is contrary to Section 20 itself. Section 20(1) states:

(1) Save as otherwise provided in section 19, where the audit of the accounts of any body or authority has not been entrusted to the Comptroller and Auditor-General by or under any law made by Parliament, he shall, if requested so to do by the President or the Governor of a State or the Administrator of a Union territory having a Legislative Assembly, as the case may be, undertake the audit of the accounts of such body or authority on such terms and conditions as may be agreed upon between him and the concerned Government and shall have, for the purposes of such audit, right of access to the books and accounts of that body or authority:

Provided that no such request shall be made except after consultation with the Comptroller and Auditor-General.

Section 20(3) provides:

“(3) The audit referred to in sub-section (1) or sub-section (2) shall not be entrusted to the Comptroller and Auditor-General except where the President or the Governor of a State or the Administrator of a Union territory having a Legislative Assembly, as the case may be, is satisfied that it is expedient so to do in the public interest and except after giving a reasonable opportunity to the concerned body or authority to make representations with regard to the proposal for such audit.”

The requirements of Section 20 are:

  1. the audit of an authority, if not entrusted to the CAG under any law of the Parliament
  2. may be entrusted to the CAG, on request of the President or Governor of a State/Administrator of a UT on the terms and conditions agreed upon between the CAG and the concerned Government
  3. after consultation with the CAG
  4. if the President/Governor/Administrator is satisfied that it is expedient so to do in the public interest
  5. after giving opportunity to represent against the proposal for audit

Clearly, while Section 20(1) is permissive of an audit not legislatively entrusted to the CAG to be entrusted to the CAG on certain conditions, it nowhere prevents an audit that is within the powers of an ordinary regulatory authority, from being entrusted to the CAG. Thus, the view of the Court that the regulatory authority’s powers to conduct audit cannot be divested in favour of the CAG finds no statutory basis.

Finally, the Court holds at para 78, the DERC’s lack of wherewithal to exercise its audit powers is held to be “no reason to fall back to the procedures and modalities prescribed in the pre-regulator regime.” Again, at para 80, the Court holds that the failure of the statutory body to perform its duties “cannot set in motion the regime prevalent prior to the constitution of the regulatory body.”

The Court here, in one fell swoop, dismisses the Constitutional office of the CAG altogether as a prior regime for audit, thus subordinating it to the regulatory regime made out by the electricity legislations. This leap of constitutional logic is needless to say, neither supported by the Constitutional text nor doctrine. The Constitution is the source of legislative (and consequently regulatory) powers. The Constitution also constitutes the office of the Comptroller and Auditor General, in Articles 148-151. Regulatory regimes and authorities born from an exercise of legislative powers, and sometimes delegated legislative powers, are therefore necessarily subordinate to powers and authorities constituted in the Constitution. Thus, regulatory audit mechanisms do not (and indeed cannot) replace or substitute the constitutional office of the CAG, and the two powers of audit must necessarily be found to co-exist. As judges are often wont to say, the stream cannot indeed rise higher than the source.

(Malavika is a Delhi-based advocate)




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Filed under Article 149 - CAG, Miscellaneous

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