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Corporate Nov 2, 2012

Reliance vs CAG: Why the latter must prevail

By R Jagannathan

The petroleum ministry has put out an elaborate defence of its impartiality in dealing with Reliance Industries Ltd's Krishna-Godavari (KG) offshore gasfields - the main focus of Team Kejriwal's accusations about alleged favours shown to Reliance. The ministry was at pains to prove it was not anybody's lackey since Kejriwal's contention was that the previous minister, Jaipal Reddy, was shifted at Reliance's instance.

Among other things, the ministry has said that there will be no increase in gas prices before 2014 - when the current pricing contract expires - and that all its actions on the KG gasfields, from approving investment increases to higher cost recoveries, were taken keeping the government's revenue interests in mind.

CAG has greater credibility today than either the oil ministry or corporates, including Reliance

The ministry has also said that the committee that supervised and allowed Reliance to increase its investments by $1 billion some time ago - which has the effect of reducing the government's revenues - had also imposed a clause that this investment would be subject to audit by the Comptroller and Auditor General (CAG).

So far, so good. But here's the problem: Reliance wants the audit to be conducted on its terms, to which CAG has said nothing doing, reports The Indian Express.

And what are the conditions Reliance wants to impose on CAG? The company wants the audit to be limited by confidentiality agreements. The audit should be a mere financial audit, and not of all the books relating to the Krishna-Godavari investments. And, most important, the audit report will be given to the oil ministry, and not to parliament. The logic for this last reason: Reliance is a private company and cannot be subjected to parliamentary oversight in this matter.

To its credit, CAG, which reports to parliament directly and not even the government, has held its ground and has said: "It has been the consistent stand of CAG that performance audit of PSCs (production sharing contracts) is covered under Section 16 of the CAG's (DPC) Act, as profit petroleum is non-tax revenue credited to the Consolidated Fund of India and such audit would involve examination of all records, including those of the operator which are relevant to our audit. This provision of CAG's (DPC) Act gives CAG the unfettered right of access to all records required for such audit and would override any conditions sought to be imposed on our audit process. ''

While Reliance may have its justification for seeking a restricted audit, here's why CAG is right and Reliance wrong, both for legal reasons and for the larger issue of transparency.

#1: Since the charge against Reliance is that it may have gold-plated its investments, and may also have arbitrarily lowered its production from the Krishna-Godavari fields, examining only the account books will not give the complete picture. CAG should have access to all information in the company's possession so that it can give the right picture to the people of this country.

#2: The government has economic interests in the KG gasfields. And since anything that the government has an interest in has to be subject to CAG audit, the latter has to have access to all relevant material from Reliance to do its job. Reliance may have a right to request secrecy in areas not involving the gasfields - for example, information about its petrochemical plants or refineries can be considered commercial secrets that need not be disclosed to parliament - but anything and everything relating to the KG offshore fields is subject to public scrutiny.

#3: While Arvind Kejriwal may have drawn many red herrings across our paths - about gas pricing, etc - the real issue is transparency in government decision-making. The public is right to ask: has the government got its due from KG offshore? Are there problems with the production sharing contracts (PSCs) which tend to favour one party or the other? A CAG audit will tell us more about the issues, so that the right policy decision can be taken both for Reliance and future PSCs.

#4: In the current public mood of suspicion of politicians and businessmen, Reliance cannot hope to convince anybody that it is in the right by seeking to restrict the scope of the CAG audit. If anything, by setting too many terms and conditions, it is reinforcing the public in its belief that it has something to hide.

#5: Let's face it: the CAG has greater credibility today than either the oil ministry or corporates, including Reliance. If Reliance has nothing to fear, why not allow the CAG to confirm this in its audit?

Mukesh Ambani would be making a gross error of judgment by putting too many hurdles to transparency. Even if something irregular is detected, his best bet is to allow the CAG to do its job and tell the world Reliance is ready for greater public scrutiny.

There is a larger point that goes beyond Reliance. In the fight to ensure greater probity, politicians cannot be expected to do all the heavy lifting or take all the blame. India Inc must put its shoulder to the wheel as well.

Disclosure: Reliance Industries has an indirect interest in Network 18, publisher of Firstpost. The author also owns shares in Reliance Industries as part of his long-term investments.

by R Jagannathan

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