Why is CJI taking on CAG with a flawed 'loss' theory

by R Jagannathan  Sep 24, 2012 12:39 IST

#2G Spectrum Scam   #CAG   #CJI   #Coalgate   #To The Contrary  

The outgoing Chief Justice of India (CJI), Sarosh H Kapadia, has given the UPA government much grief, thanks to his Vodafone judgment, but on Saturday he could not but have warmed their cockles with his indirect observations on the 2G scam and judicial activism.

Kapil “zero-loss” Sibal and Palanippan “zero-loss” Chidambaram will feel vindicated.

Though he did not actually criticise the estimates of the Comptroller and Auditor General (CAG) – who had put the presumptive loss on 2G spectrum at Rs 1,76,000 crore and the unintended “gains” in the coal block allocations at Rs 1,86,000 crore – there is no doubt he gave the CAG’s critics, which include the PM, ammunition for the same.

According to a report in The Indian Express, the CJI said: “Loss is a matter of fact and profit and gain is a matter of opinion.”  So, by implication, the CAG is talking through his hat.

Has the outgoing CJI's words aided the cause of Manmohan Singh? Image courtesy PIB.

The CJI expanded on his basic statement thus: “Today a number of controversies on valuation are discussed, but the basic principle of valuation is that loss is a matter of fact and profit or gain is a matter of opinion. Please apply this test to the controversies going on. I do not want to discuss anything further. Loss is a matter of fact and profit and gain is a matter of opinion. So if you understand these principles, we will be able to judge. Our perceptions will become more sound and we know where the shoe pinches.”

Correction, Chief Justice Kapadia. If you are merely saying that the loss figures on 2G and coal blocks depend on the assumptions made by the CAG and are thus mere guesstimates, we are with you. But to claim that “loss is a matter of fact” is also quite wrong.

In accounting principles, loss is a matter of recognition, and not just fact. Unless you are in a business where revenues and costs are accounted for only on a cash basis, loss too is often a matter of opinion.

As any qualified CA can tell you, companies can turn losses into profits, and profits into losses, depending on what revenues or costs they choose to recognise. You can turn a loss into a profit by changing the depreciation method from written down value (WDV) method to straightline, or by valuing inventories and sales differently. A construction company can recognise revenues one quarter earlier or one quarter later, depending on how much of a project is complete, rather than when sales actually materialise. This impacts the loss figure, if any.

In the case of banks, a bad loan can be made good by rescheduling a loan and thus a loss can be turned into a profit. Conversely, by providing for a potential loss in advance, a profit can be turned into a loss – if a bank or company wants to do so. Many small-time promoters, in fact, do this to influence market prices and indulge in insider trading. Smart banks like HDFC, for example, also tweak their income, cost and bad loan recognition norms to smoothen out results from quarter to quarter.

In short, loss is as much a matter of opinion as profit or gain. The CJI could consider this fact to modify his views.

But since the purpose of his observations must have been to contradict the CAG on his 2G and coal block loss figures, let us also deal with them again.

Firstpost would readily agree that the CAG’s sensational loss figures may have grabbed media attention like never before and focused attention on the “losses” per se rather than the real problem: lack of transparency in decision-making and possible attempts to help out crony capitalists.

However, can the CJI really claim that selling 2G spectrum at prices lower than what the market can bear is not a loss to the exchequer? It’s not about the quantum of the loss, but that there was a loss is certain. Similarly, how can one say that there was no loss in handing over coal mines for free to 142 businessmen without a transparent policy?

The CJI is surely right in emphasising that the courts (and the CAG) should not transgress into the policy-making area, but surely it is the CAG’s duty to point out what the costs of a policy were?

Does it make sense for a government – any government – to decide to sell spectrum or allot coal blocks without quantifying the losses and gains?

It is possible to justify free coal block allotments of Rs 1,86,000 crore (as the CAG claims) if the government can equally quantify social or other benefits of a similar amount. It is all right to sell spectrum at 2001 prices, or even give it away free, if there are larger social benefits to be had (teledensity), but governments that want to do this must find a way to quantify the losses and gains, however, presumptive they may seem.

In the absence of this kind of costs-and-benefits calculations, on what legitimate basis can any government decide to go for an auction or a first-come-first-served scheme when it does not know why it is doing so?

CJI Kapadia is surely right to ask everyone to take the loss or gain figures with a pinch of salt, but no government should draw comfort from this. Governments have no right to take policy decisions without trying to at least estimate who will gain or lose. The figures may be wrong or wildly out of whack in hindsight, but they will at least have the legitimacy of a well-thought-out line of reasoning.

The2G and coal block allocations are scams precisely because the government did not do the calculations that the CAG did post facto. The CJI would have done well to emphasise this aspect, rather than just suggest that the loss figures are not fact.

Half-truths are of no use to anybody.

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