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CAG versus CAG

In his report on the Centaur Hotels, the CAG makes a fine point about the cost of capital having been put at 9.3 per cent instead of 8.5 per...

In his report on the Centaur Hotels, the CAG makes a fine point about the cost of capital having been put at 9.3 per cent instead of 8.5 per cent — as had been done in BALCO, IBP, etc.

Anyone with the slightest acquaintance with valuation — including the CAG — knows that risk differs from sector to sector: hence the discount factor, the cost of capital will differ from sector to sector.

The risk for which a borrower in the tourism sector will have to compensate the lender will be much greater than a borrower would have to in the aluminium sector. The risk for which a borrower in the steel sector would have had to compensate a lender five years ago was much higher than it is today — the demand from China having raised steel prices to levels inconceivable five years ago.

Nor can recent trends or current levels be projected into the indefinite future. Today petroleum prices have reached unprecedented heights. Should a lender advancing money to a company investing in the petroleum sector assume that these levels will continue, or reach $100, or fall back to $50? Judgments will differ.

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The CAG himself would be aware of this, as I shall soon show. With equally keen insight he says the cost of equity was taken at 9.9 per cent instead of 9.3 per cent… Each figure was worked at length by the Advisors, and debated by two levels of officers — an Inter-Ministerial Group headed by the Secretary of the Administrative Ministry concerned, and the Core Group of Secretaries headed by the Cabinet Secretary himself.

But I am dwelling on the fine details! On the fact that the CAG builds so much on 9.9 per cent versus 9.3 per cent, etc. Assume that he is entirely justified in all this. Let us, therefore, see what he does in the case of the Delhi Vidyut Board — I will come to an even more scrumptious case soon and request you to ask whether a CBI inquiry is not warranted into that.

The CAG reports that the distribution enterprise of Delhi Vidyut Board was valued at Rs 3,160 crore. On what basis? The CAG writes that he asked the Delhi Government for the basis of the valuation, and that the Government told him that it did not know the basis. It said that this lay in ‘‘the computer modeling’’ that was available only with the Advisor. The easiest thing would have been to ask the Advisor to supply the details from this black box of ‘‘the computer modeling’’. Did the CAG ask for it? Not at all. The Government, he records, told him that ‘‘normally’’ Advisors do not disclose ‘‘the computer modeling’’, ‘‘as they regarded it as their business secret’’. Even the Government had only said that the Advisors regard the model as their business secret ‘‘normally’’. Was this such an insuperable bar for the CAG? The answer is clear as can be. And it lies in nothing less than the Act under which the CAG is appointed and functions — The Comptroller and Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971.


Section 18(1) of the Act recalls the duties of the CAG, and specifies the powers he has to discharge those duties. In view of what the CAG did in regard to the Delhi Vidyut Board valuation, the section deserves to be read with some care. The section lays down that the CAG ‘‘shall’’ — not ‘‘may’’, not ‘‘subject to Advisors normally regarding their computer modeling as their business secret’’ — the CAG ‘‘shall in connection with the performance of his duties under this Act’’ have the authority …. ‘‘to require’’ — not ‘‘to request’’, not ‘‘to plead for subject to what the Advisors normally regard as their business secret’’ — ‘‘that any accounts, books, papers and other documents which deal with or form the basis of or are otherwise relevant to the transactions to which his duties in respect of audit extend, shall be sent to such place as he may appoint for his inspection.’’

Again ‘‘shall’’, not ‘‘may subject to what the Advisors normally maintain,’’ nor subject to what the Government says they normally maintain. This being his duty, these being his powers, what did the CAG do when he was told that the details of valuation — the equivalents of those 9.9 per cents versus 9.3 per cents — lay concealed in the computers of the Advisors and the latter ‘‘normally’’ regarded these as their ‘‘business secrets’’?

He got, and was happily content with ‘‘a note setting out the methodology adopted in asset valuation’’. That this note contained nothing is obvious from what he states in the next paragraph of his report on the privatization of the Delhi Vidyut Board.


He says, ‘‘A scrutiny of the note indicated that while the general methodology had been explained, the basic figures adopted, the weightages given and assumptions made were not indicated and hence the basis of arriving at the final figure of Rs 3,160 crore could not be verified.’’ Is the CAG so helpless in the face of the claim ‘‘normally’’ made by Advisors?

Is he not duty bound to pursue the matter and demand and get the details?

Section 18(1) of the CAG Act proceeds to say, ‘‘The Comptroller and Auditor-General shall in connection with the performance of his duties under this Act, have authority…. to put such questions or make such observations as he may consider necessary, to the person in charge of the office and to call for such information as he may require for the preparation of any account or report which it is his duty to prepare.’’

That is his duty. Those are his powers. And the most delectable detail: the Advisors were not some foreign company that could, Bofors-like, take shelter behind some ‘‘customer-confidentiality’’ clause; the Advisors were SBI Caps, a public sector company! But, what does the CAG do? He just records, ‘‘The Government had evidently relied solely on the report of the consultant.’’ And lets the matter rest in peace!

That this abdication by the CAG helped not just the (Congress-I) Government of Delhi, that it helped two private companies — Reliance and TATAs — is manifest from the very next paragraph of the CAG’s own report. And remember, each of these two companies was the sole bidder in the circles that were handed over to them.


Recall that the enterprise was valued at Rs 3,160 crore. The CAG is constrained to record in the very next paragraph that there was ‘‘a difference’’ — note the delicate words, ‘‘a difference’’! — in the balance sheet that was used by the Advisor for valuation and the actual balance sheet! The amount that was due to the company — hence, an important part of the value of the company — as assumed by the Advisor differed from the amount that was actually due by Rs three thousand one hundred and seven crore sixty two lakhs! Total value of the company? Rs 3,160 crore. A difference in this one component of the assets of the company? Rs 3,107 crore. And our friend leaves the matter at that! Discharging his duty? Exercising his powers? Or throwing another blanket over what is already a massive cover-up?

And by his decision not to do his duty, by his decision not to exercise the powers that have been given to him by law, huge benefits accrue to two private companies as well as, to use the current phrase, ‘‘unknown persons’’ in Government. Not worthy of a CBI inquiry?


And yet that is just the beginning. The next part of the very same paragraph reveals an equally astonishing ‘‘difference’’. For purposes of valuation, the accounts that had to be used were of June 2002 — that is, when the Board’s operations were privatized. Instead, the accounts that were used were of a year later. Not just that, there was a convenient way of estimating the amount that the Board was to receive from various quarters, specially the bulk-consumers, the big fish that the Marxists are always concerned to catch.

The CAG reveals that, instead of using the figures that were available in the ledger, the valuation was done by a most innovative method: ‘‘the amount was calculated,’’ reports the CAG, ‘‘by adding the arrears on 31 March 1994’’ — yes,1994, remember that the privatization was being done in 2002 — ‘‘to the arrears of June 2002 as shown in the bills of June 2002….‘‘Why, pray? I don’t find the Marxists asking their usual questions: By whom? For whom?!


‘‘The fact remains’’, the CAG records, that it was the responsibility of the Delhi Government’s ‘‘holding company’’ to recover the amounts from the two single bidders to whom the Board had been given. Yet, ‘‘the erstwhile DVB/Government had failed to finalize the accounts for the period April 2000 to June 2002 even after 18 months of privatization. The Holding Company had failed to recover any amount of bulk supply arrears from DISCOMs (that is, Reliance and TATAs, the victorious single-bidders) till 31 March 2003 (the closing date for the CAG’s report) and was also not in a position to provide details of arrears of DVB consumer-wise as on June 2002. Moreover, the opening Balance Sheet of the Holding Company did not depict the complete picture as old debts were not shown in the Balance Sheet since the opening Balance Sheet was in statement form only.’’

No stricture? No CBI inquiry into who helped who benefit?

But even that is just a glimpse of what else the CAG found. To take one illustration, there were stores, he records. These were valued at Rs 77.47 crore. They were transferred to the two private companies — those victorious single-bidders — ‘‘however, no payment was received.’’ In simple words, they were made over to the two private companies free! And then there were things that were conveniently labeled ‘‘scrap’’. Again, nothing was taken for making these over.

This little discrepancy ‘‘has resulted in a blockage of funds of Rs 105.71 crore as well as a consequent loss of interest of at least Rs 3.48 crore calculated at minimum bank rate of interest of six per cent.’’

Now that the CBI is to examine why no interest was charged from the winner of the Juhu Hotel bid for the period for which the hotel was not handed over to him, I will be watching with baited breath what the CBI does about the interest that was not charged for items that were actually handed over to these two private companies, and for the amounts that were allowed to remain blocked.

But even these are mere tidbits, as we shall soon see.

(To be concluded tomorrow)

First published on: 19-08-2005 at 12:00:00 am
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