Socialising Shareholders Interests

It’s not just the Aam Aadmi Party that makes the New Year radically new. All around us, ideological assumptions on the foundation of which we have built our nation are being put to the test. On January 6th, 2014, the Delhi High Court has ruled in the Association of Unified Telecom Service Providers Case that if you provide a revenue stream to the government, the Controller General of Accounts can come snooping into your finance department. We know that even that rag picker under the half built flyover buys a tax-paid soap sometimes: should CAG be auditing his spend in defence of the Government’s top-line?

As we get into this issue, let’s also understand the underlying ideological question. For a start, let us accept that political theory, like the length of skirts, is driven by fashions. The Great War 1914-18 heralded the end of the Colonial era and brought on the modern – partially Socialist – one. Predictably, it was to a Fabien (read vaguely leftist) vision of modern India that our Constitution turned. ¬†After independence, we increasingly succumbed as we went along, drifting further left of centre till in 1976, we expanded the Preamble of our Constitution to redefine ourselves as a ‘Sovereign Socialist Secular Democratic Republic’. Any which way you look at it, our legal system is nothing but a manifestation of a political ideology. Inevitably, this meant a great judicial romance with a grossly underfunded welfare state that distributed free lunches and crippled business.

Unfortunately, the global love affair with socialist idealism ended in 1991. Maggie Thatcher fought a pitched battle with the unions between 1980 and 1990 to convince her people that Governments do most things badly. Mikhail Gorbochev fought another battle to dismantle the Soviet Union’s version of a welfare state till his actions dissolved the USSR itself in 1991. This had its impact on Indian politics. Narasimha Rao changed course in 1991, liberalising the domestic economy and reaching out to global business by deregulating inbound investment. Our judiciary was quick to react to this turnabout. It reduced its intervention in corporate affairs, stopped protecting jobs at all costs, stopped supporting labour right to be paid not to work, stopped protecting tenants from their landlords, and so forth. Lawyers who have lived through the 1980s have experienced a huge shift in the attitude of the courts towards private capital in the last twenty years. In the judiciary’s mind today, no matter what anyone may posture, shareholder sovereignty has primacy, shopkeepers are not scum, Governments should keep out of corporate hair and Governments of the day are not the best judge of public policy.

Unfortunately, global events have proved that too few laws may be no better than too many laws. The Wall Street Subprime Crises of September 2008 has reminded us that you have to be crazy to believe that businessmen will police themselves: the law has to do its job. At the same time, we know that corporates of the future will rule the world. Already, Yahoo is bigger than Mongolia, Visa is bigger than Zimbabwe, EBay is bigger than Madagascar and Nike is bigger than Paraguay. At the top end of the spectrum, Chevron is bigger than the Czech Republic, Exxon Mobil is bigger than Thailand and Walmart is bigger than Norway (a top 25 income country).

Naturally, the decline of government and the corresponding rise of corporations raise grave legal issues. Inevitably, courts suspect there is something terribly wrong in a regulatory regime founded on the idea that a company belongs only its shareholders and the devil can have the rest. This is why Indian courts have in recent years looked closely at the wholesale usurpation of peasant lands, about company funded private vigilante armies, about profiteering schools, about the environmental costs of economic development, and so on and so forth. The biggest issue facing the law today is this: if countries will now be run on corporate interests, how do we balance the interests of corporate shareholders with the interests of a nation’s citizens generally? This is the real question that the Delhi High Court was called upon to decide in Association of Unified Telecom Service Providers versus Union of India.

The genesis of the dispute lay in Trai’s request to telecom companies in May 2010 to have their accounts verified by CAG. Considering that CAG had accused the Government of a Rs 1,766-crore scam two months previously, telecom companies were naturally skittish. In fairness, since telecom companies paid a revenue share to the Government, their licenses provided for several kinds of verification of their accounts. All else apart, the Government drew the court’s attention to its contractual right to appoint “Special Auditors” at the cost of these Licensees with the same power as the Statutory Auditor of a company.

The court agreed. It also saw the issue in its larger ideological perspective. It acknowledged that we cannot leave companies to be regulated by company law alone because companies treat themselves as being answerable only to shareholders. Curiously, although these “property rights” in shareholding are created by law, the same law does not require these property owning shareholders to perform certain reciprocal obligations in the bargain. The court also took the point that the government acts as a custodian of a public asset when it allows telecom companies to use this national resource in exchange for a revenue share. It follows that “licensees are the accountant of the Central Government with respect tothe complete, accurate and honest maintenance of the books as to anytransaction(s) involving revenue”. Good faith must inform this contractual relationship, the court observed.

Now, under Article 149 of the Constitution of India, it is the constitutional duty of CAG to “exercise such powers in relation to the accounts of the Union and the States and of any other authority or body as may be prescribed by or under any law made by Parliament”. Parliament has of course made such a law: The Controller and Auditor General (Duties, Powers and Conditions of Service) Act, 1971. Since a share of telecom revenue is part of the Government’s income, CAG is duty bound to perform all of its duties by auditing this income at its source.

The implications of this judgment are far reaching. If CAG has to protect every revenue stream the Government has, where does it leave a tax paying citizen like me? Twenty two years of ‘liberalisation’ has not changed the basic fact that our socialist sovereign Government has a finger in every revenue stream it possibly can and so, by the logic of this judgment, only a subsistence islander living on barter and fishing in the far south of the Andaman sits outside CAG’s jurisdiction. In a predatory state like India where a lot of lofty reasons have been used to inflict grave injustice on its citizens, this is truly an alarming risk to run.

In fairness, the court has seen this risk. It has specifically observed that CAG can only audit receipts and “not confuse himself with his wide all-embracing power under Section 14(2) of the Controller and Auditor General (Duties, Powers and Conditions of Service) Act, 1971 which includes inquiries into aspects like faithfulness, wisdom and economy in expenditures”. Hopefully, the same principle applies to CAG’s ambition to audit someone like me, even though this is no great solace. In the days to come, CAG’s new found power could prove very opportune should the Aam Aadmi Party’s zealous desire to audit the accounts of Delhi’s power utilities move forward.

What we are left with at the end of the day is a fundamental ideological issue. We know that we all want a more service oriented, less intrusive government. This is impossible without letting corporate entities perform roles that Government hitherto have. That requires us to trust corporations in the same way that we hoped we could have trusted the Government. If corporations do not believe that they owe the people of India anything – that they will act in the best interest of only their shareholders – how can the rest of us, including the courts, trust them? So how do we find that golden mean that both protects private profits and protects public money? As a tax payer, I want to know where my money is spent. As a law firm, I also want Government out of my hair. What regulation will best achieve both ends? The answer my friend is blowing in the wind.

Originally Published on January 16, 2014 in Businessworld 

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