2014 (1) TMI 661 - HC - Indian Laws

Legal authority confirmed for CAG audit of telecom companies under TRAI Rules & CAG Act

Association of Unified Telecom Service Providers of India & Others Versus UOI & Others

The court upheld the Comptroller and Auditor General's (CAG) authority to audit telecom companies' accounts under Rule 5 of the TRAI Rules, 2002, and ... Power of the CAG of India to conduct revenue audit of telecommunication companies – Held that:- The bodies or authorities accounts would be subject to an audit by the Comptroller and Auditor General of India would be the ones as suggested by the petitioners and that the private telecom companies would not be the bodies or authorities conceived of by Article 149 of the Constitution of India - the interpretation of every statutory provision must keep pace with changing concepts and values and it must, to the extent to which its language permits or rather does not prohibit, suffer adjustments through judicial interpretation so as to accord with the requirement of the fast changing society which is undergoing rapid social and economic transformation. Under the terms of the licence agreement the licensee has undertaken the accounting responsibility for the Central Government as well as itself - the accounts of the licensees, in relation to the revenue receipts can be said to be the accounts of the Central Government and thus subject to a revenue audit as per Section 16 of the Comptroller and Auditor General (Duties, Powers and Conditions of Service) Act, 1971. Neither Rule 5 of the Telecom Regulatory Authority of India, Service Providers (Maintenance of Books of Accounts and other Documents) Rules, 2002 is ultra vires Section 16 of the Comptroller and Auditor General (Duties, Powers and Conditions of Service) Act, 1971 nor is Section 16 ultra vires Article 149 of the Constitution of India - The Rule and the Section fits perfectly into the constitutional scheme of every rupee flowing into the Consolidated Fund of India, by way of revenue, to be audited by the Comptroller and Auditor General of India - The Rule, the Section and the constitutional provisions as interpreted by us perfectly fit the critical features of the new emerging regulatory State which has to reconstruct institution on the ruins of the club government requiring displacing the key feature of the club with standardization and formality - the provision of systematic information accessible both to insiders and outsiders and strengthening the control mechanism and public reporting – Decided against Petitioner. Issues Involved:1. The necessity and scope of a regulatory regime post-liberalization.2. The inadequacies of traditional company law in regulating privatized utilities.3. The fiduciary duties of licensees under the telecom license agreements.4. The constitutional and statutory powers of the Comptroller and Auditor General (CAG) to audit private telecom companies.5. The validity of Rule 5 of the Telecom Regulatory Authority of India, Service Providers (Maintenance of Books of Accounts and other Documents) Rules, 2002.Detailed Analysis:1. Necessity and Scope of a Regulatory Regime Post-Liberalization:The judgment recognizes a shift from traditional governance to a regulatory state influenced by post-World War II liberal economic policies. The new economic order required professionalism, technical expertise, and administrative competence. This shift necessitated a regulatory regime to fill the void left by traditional company law, which was inadequate for the complexities of privatized utilities.2. Inadequacies of Traditional Company Law:Traditional company law failed to address three critical questions: the relationship between legal owners and managers, the claims beyond legal ownership for governance, and the relationship between corporations and the democratic state. The judgment highlights that company law treated corporate affairs as private matters, ignoring the public obligations and privileges conferred by the state, such as limited liability. This oversight necessitated a new regulatory framework to ensure public accountability and transparency.3. Fiduciary Duties of Licensees:The license agreements between the Central Government and private telecom companies, such as the one with M/s. Tata Teleservices Ltd., are akin to a joint venture. The licensees have a fiduciary duty to maintain accurate accounts and share revenue with the government. The judgment emphasizes that every contract contains an implied covenant of good faith and fair dealing, obligating parties to refrain from actions that would harm the other's right to the contract's benefits.4. Constitutional and Statutory Powers of CAG:Article 149 of the Constitution mandates the CAG to audit accounts of the Union, States, and other authorities as prescribed by law. Sections 10, 13, 14, and 16 of the CAG (Duties, Powers and Conditions of Service) Act, 1971, outline the CAG's responsibilities, including auditing all receipts payable into the Consolidated Fund of India. The judgment interprets that the revenue generated by telecom licensees, being part of the national resource, falls under the CAG's audit purview. Thus, the CAG's power to audit private telecom companies' accounts is constitutionally and statutorily valid.5. Validity of Rule 5 of TRAI Rules, 2002:Rule 5 requires telecom service providers to produce books of accounts for CAG's audit. The petitioners challenged its validity, arguing it was ultra vires Section 16 of the CAG Act and Article 149 of the Constitution. The judgment concludes that Rule 5 aligns with Section 16 and Article 149, fitting into the constitutional scheme of auditing revenue flowing into the Consolidated Fund of India. The rule is essential for the new regulatory state's functioning, ensuring transparency and accountability.Conclusion:The judgment dismisses the writ petitions, upholding the CAG's power to audit telecom companies' accounts under Rule 5 of the TRAI Rules, 2002, and Section 16 of the CAG Act, 1971. It emphasizes the necessity of regulatory oversight in the liberalized economy and the fiduciary responsibilities of licensees. The judgment also highlights the importance of a cooperative approach between regulators and the regulated to ensure effective governance and public confidence.