On 30 October 2015 came the news that the Delhi High Court has rejected the CAG audit of three power distribution companies operating in Delhi and termed the draft audit report “inoperative.” The main question arising from this judgment is whether the Supreme Audit Institution of India can cover a private entity, which does not satisfy the test of 'State' within the meaning of Article 12, by reading the words 'body or authority' in Article 149 of the Constitution of India and the CAG Duties, Powers and Conditions of Services Act (DPC) Act with wide amplitude?

A long standing question pertaining to CAG audits has been whether the recent judgment of the Delhi High Court has answered that question in positive (refer para 42 on Page no 80 of 139 of the judgement).

However, having answered that question in positive, it goes on to suggest that while the Government of National Capital Territory of Delhi (GNCTD) could have given a directive to carry out such an audit exercise to CAG of India under Section 20 (1) of the CAG Act, such a directive should have only been issued after granting sufficient time to the entity to be audited for an opportunity to represent against the proposal for audit disclosing the public interest in which such an audit exercise was deemed to be expedient, and engaging in due consultation with the CAG of India as provided under the stipulations in Section 20 (3) of the CAG Act.

Further, the judgment takes the view that the said audit under Section 20 (1) for the reason stated (that is, determination of tariff) is not expedient, since tariff determination is the sole domain of DERC. The Court suggests that "the report of the CAG of audit of DISCOMs has no place in the regulatory regime brought about by the Electricity Act 2003 and the Delhi Electricity Reform Act 2000."


April 2013: Sheila Dixit-led Delhi Government comes under heavy criticism by the Aam Aadmi Party, for bowing to the discoms’ wishes to avoid a CAG audit; AAP leader vows to get these companies audited by the CAG if voted to power.

December 2013: As soon as the Arvind Kejriwal-led Delhi government announces that his government has sought the CAG audit of power distribution companies, Dalal Street responds by the prices of shares going down.

January 2014: Three power distribution companies challenge the jurisdiction of CAG audit and petitions Delhi High Court; pleads that the court grant a stay on the initiation of the CAG audit.

January 2014:  A single-judge bench of Delhi High Court admits the petition by power distribution companies and refuses to grant stay; posts the next hearing on 19 March.  Three power distribution companies then move a larger bench of the Delhi High Court this January order.

4 March 2014: Delhi Government and CAG of India’s counsels tell the court that power distribution companies were not cooperating despite the high court order.

24 March 2014: During yet another hearing on the matter, Delhi High Court directs the three power distribution companies to cooperate with the CAG’s auditing of their accounts.

13 May 2014: The counsel of CAG of India once again submits before the honourable court that discoms have not been cooperating with the auditors.

26 May 2014: The court defers the hearing without granting any relief to discoms.

February 2015/August 2015: Media publishes news stories about what CAG audit of discoms might come up with and cites a 212-page-long Draft Audit Report that details how discoms inflated dues by Rs 8000 crore.

21 August 2015: Delhi High Court directs the Delhi Government not to act against the power distribution companies on the basis of any interim CAG audit reports and posts the matter for further hearing on 11 September.

22 August 2015: Yet another news story quotes the draft audit report to inform readers that power distribution companies had supplied CAG auditors with incomplete data.

12 October 2015: Delhi High court rules against the plea by Tata Power Delhi Distribution Limited, seeking a stay on the scheduled exit conference on the draft audit report on Power Distribution Companies in Delhi. The court while refusing the grant stay stated  that “any steps taken on the audit report would be subject to its further orders”.


Setting boundaries for the CAG

What the honourable high court seems to have missed is that beside having powers to initiate audit of DISCOMs under section 20 (1) of the CAG Act, the SAI of India also has powers to undertake audit of DERC and for initiating the same, it doesn't have to wait for a directive from GNCTD or an appeal from DERC.

During the arguments in the said case, certain counsels had even reminded the court that:

1: The tariff division of DERC had sought CAG audit since, the refusal of the DISCOMs to substantiate or render explanations of the documents produced by them led to strong suspicions.

2. Tariff division had observed that since there existed such a strong ground for suspicion, no reliance can be placed on the auditor’s certificate until and unless the DISCOMs establish the source of document and data.

3. Since DERC is under the purview of CAG audit, not merely on financial matters, but on the performance matters as well, DERC had expressed that the due diligence principle required that CAG also looks into the documents filed for tariff determination to DERC.

In paragraph 68 of the judgment, it has been suggested that: “The DERC, under the terms of licence and the laws, rules and regulations is entitled to control the said costs that Power DISCOMS have booked in the tariff applications and no costs can be incurred without the approval of DERC. We really wonder as to how, after the DERC has approved of such costs, the report of CAG can be of any help.

The logic that is followed in the above suggestion actually arises from ambiguity over the contentious question of whether the CAG of India should exercise its auditing mandate over the distribution companies as per section 20 (1) of the CAG (DPC)Act. Performance audits by the CAG of India do not only tick the boxes  – that is, it would not merely ascertain whether the DERC approved the costs but would also have gone into details to scrutinize whether the DERC had exercised due diligence while approving these costs.

Further in the matter of the case, it was also pointed out by counsels that the DERC had sought such a scrutiny by the CAG of India of the books of accounts of distribution companies. This was reflective of their concern that DERC itself had felt at that moment that they might have failed to exercise their due diligence function in carrying out its tasks involving judicious approval of costs and consequent tariff fixation.

To show how performance audits do not merely refer to financial transactions, we only need to cite a couple of examples of such audit. These performance audits show that the CAG of India in the course of an audit not merely deal with the verification of financial accounts, but also with the process-related issues of the entities being audited.

Such performance audits have pointed out how certain acts of omission and commission by an audited entity might have resulted in undue favour being extended to a third party (a corporate entity whose books are not directly under the auditing mandate of CAG of India).

The CAG of India in its performance audit of the loan disbursed by Power Finance Corporation (PFC) to Shree Maheshwar Hydroelectric Power Corporation Ltd had pointed out the following:

While approving the loan to the party promoted by S. Kumars Group, the Board of Directors (BOD) had directed that the PFC’s financing would be released only after the promoters bring in equity as committed by them. Despite the pre-disbursement conditions not being fulfilled, the PFC released Rs 99.32 crore. The party, however, started defaulting in payment of interest from October 2000 and did not pay interest amounting to Rs 39.54 crore till 31 March 2003. Implementation of the project has been held up since February 2001 due to promoters’ inability to bring in further equity, backing out of the foreign collaborators and non-release of further disbursements of the loans by the other financial institutions owing to default by the party."

In response to this comment, the PFC management sought to argue that it had been following “the same pre-disbursement conditions as of the lead financial institution of the consortium (i.e. IFCI) in accordance with its policy and relaxed the conditions in line with the dispensation made by the lead institution."

The CAG of India in its report refuted this argument saying, "The reply is not acceptable, as according to its policy, the PFC could stipulate additional terms and conditions or procedures. In view of the reservations of its BOD about the financial position of the promoter group as regards its capability to invest in equity, the PFC should have safeguarded its financial interest by ensuring compliance of the pre-disbursement conditions, for which the lead institution was not responsible."

Similarly, in another performance audit report of a loan extended by the Power Finance Corporation to Jindal Thermal Power Project, the CAG of India had pointed out that:

“…the reply is not tenable as the Company failed to incorporate the clause for recovery of hedging cost in the agreement in deviation of its internal circular of December 2002, nor did it fix any responsibility for this lapse. As regards restructuring of interest rate on Rupee Term Loan, this was neither in accordance with the loan agreement, nor with the prevailing interest restructuring policy of PFC."

This is as close as an auditor can get to saying that the PFC had breached all governance norms. In actual terms, the CAG probe into the PFC-Jindal financing violations raises more questions.

Thus, there are clear grounds to suggest that an audit of DISCOMs under section 20 (1) of CAG Act, accompanied by a simultaneous performance review of DERC under section 14 of CAG Act on whether it exercised due diligence while determining tariff fixation, could definitely have been legitimate.

Needless to say in the light of the above that paragraph 86 of the judgement is the most unfortunate part, wherein the Court has said, "Needless to say, all action undertaken in pursuance of the impugned directive are also rendered inoperative and to no effect".

Will the honourable judges please explain if the Supreme Audit Institution has actually acted on the directive by GNCTD to carry out audit of DISCOMs under section 20 (1)? Does there exist a certain draft audit report on the DISCOMs, and if so, why shouldn't that document be in the public domain? Now that public offices such as CAG of India are covered under the ambit of Right to Information Act, 2005 it is inexplicable why the audit findings contained in the draft report cannot be accessed and discussed by citizens of the country.