New Delhi: The decision to adopt a skewed revenue sharing model and a host of other irregularities in Sikkim’s state lotteries turned a handful of private marketing agents and distributors into “de facto beneficiaries” and left the government with “meagre revenue”, the Comptroller and Auditor General (CAG) has observed in a new audit report.

The audit found that while over Rs 40,000 crore in sale proceeds were generated from 2010 to 2016, the state government received a little less than Rs 180 crore in revenue during the same period.

In a report tabled in the last week of January 2018, the national auditor has also pointed towards irregularities in the appointment of Pan India Network Pvt Limited – a company that is associated with Rajya Sabha MP Subhash Chandra’s Essel Group – as one of the marketing agents (MA) in 2012.

In specific, it has stated that the tendering process – which saw the Essel-associated firm being appointed as an MA – had “no real competition” and was a “case of collusive bidding” as Pan India Network’s only competition was a “sister concern” or a firm that may have been associated with the Essel Group.

The auditor also records how, in light of the alleged “collusive bidding”, the tender committee decided to call for a fresh tender, with Sikkim chief minister Pawan Kumar Chamling eventually also approving the decision. However, this decision was apparently reversed within a day by the government as “invitation of fresh bids would cause delay and loss of revenue to the state”.

In a statement to The Wire, Pan India Network officials denied that the sister concern identified by the CAG – a company called Tashi Delek Gaming Solutions – is associated with the Essel Group. They also stated that there was “no question of any collusive bidding” as there was a “publication of the bidding in the prominent newspaper of india by State Government of Sikkim”.

When sent a questionnaire, Chandra replied: “I do not know why this is marked to me. I have nothing to do with this.”

Lotteries in Northeast India

Over the past four years, government-run lottery schemes in the states of Sikkim, Mizoram and Nagaland have come under the scanner of law enforcement authorities and the Centre. In 2015, the home ministry ordered a CAG audit in the lotteries of these three northeast states.

The immediate trigger, according to media reports from the time, was how money linked to alleged lottery mafia don Santiago Martin appeared to have been earmarked for distribution in the Bihar state elections.

However, more crucially, Union home minister Rajnath Singh also appeared to be worried about rampant allegations of corruption and how state-run lottery elections were being cornered by a handful of private companies – a matter that had been raised in a PIL before the Calcutta high court. The audit, a home ministry official was quoted by the Economic Times as saying, would also likely “provide the real estimates of loss to the exchequer”.

Over the last year, the CAG’s audit reports have started rolling in. As The Wire reported in June 2017, its assessment of the Mizoram state lotteries also red-flagged flagrant procedural violations, the non-deposit of over Rs 11,000 crore in money that was due to the state exchequer, irregularities in the overall process and the need for a better revenue sharing model.

In Mizoram too, the auditor pointed out flaws in the way state government officials administered the lottery process, with the audit report also identifying two firms associated with the Essel Group (E-Cool Gaming and Pan India Network).

Revenue sharing

Both the Lotteries (Regulation) Act 1998 and the Lottery (Regulation) Rules notified in April 2010 require that any state that organises lotteries should ensure that the “proceeds of the sale of lottery tickets as received from the distributors… are deposited in the public ledger account or in the consolidated fund of the organising state.”

From the sales proceeds that are deposited, the state government is then supposed to handle the expenses involved (prize money payments, printing charges, operational expenditure, taxes). And then, from the balance amount, the state is supposed to decide how much revenue it gets and the commission that the marketing agents it appoints are supposed to receive.

However, in the case of Sikkim, rather than try and work out an appropriate revenue-sharing agreement that would take into account volume of sales and maximisation of government revenue, the state government accepted a fixed “minimum guaranteed revenue (MGR)” model whereby it would accept the MGR offered by the marketing agents (MA) it appointed.

As the CAG points out, the MAs (which include the Essel firm) “appeared to be the de facto beneficiaries of the state’s lotteries”:

“The sale proceeds deposited to government account constituted only 1.40 per cent of the total sale proceeds while 98.60 per cent of the proceeds were retained by the MAs. The net revenue (MGR) realised by the State after meeting the expenses on draw, printing costs of lottery tickets, prize money above Rs 10,000 etc. constituted a mere 0.40 per cent of the sale proceeds. Thus, the MAs appeared to be the de facto beneficiaries of the State’s Lotteries while the State received a meagre revenue from its Lotteries’ business.” (emphasis added)

The problem, as the auditor notes, is that adopting an MGR model meant that the government’s revenue wasn’t linked to actual sales turnover.

So while, the sales turnover of Sikkim’s lotteries jumped from Rs 5,055 crore in 2010-11 to Rs 11,591.15 crore in 2015-2016, “there was no corresponding increase in revenue shares paid to government”.

As shown below, total sale proceeds of Rs 44,834.87 crore were recorded during 2010-16. The Sikkim state government, however, received only Rs 179.75 crore in revenue in the same period.

How much revenue went to all the marketing agents that were appointed in Sikkim? The CAG doesn’t say, but its calculations in other northeastern states like Mizoram show that distributors/agents generally get anywhere between 15%-20% of gross sales.

For instance, in Mizoram (which also had a skewed revenue-sharing model), out of total sale proceeds of Rs 11,834 crore over three years (2012-2015), revenue that accrued to distributors was Rs 2,182.79 crore (18.4% of gross sale) while the state government received a paltry revenue of Rs 25.45 crore (0.22% of the gross sale).

In the case of Sikkim, this percentage, for argument’s sake, would translate, at the lower end, to revenue of Rs 6,725.1 crore over six years (2010-2016) for the marketing agents/distributors. To put this figure in perspective, Sikkim’s budget for 2018-2019 is a little over Rs 7,000 crore.

In states like Kerala, where the lottery business is a booming industry, 32% of revenue generated by sale of tickets goes towards agent commission while 20% is retained as profit by the government.

As the CAG critically notes, however, the percentage of revenue paid out to the Sikkim government actually declined from 0.60% in 2010-11 to 0.27% in 2014-15:

“…While the volume of sales and the corresponding income of the MAs increased by over 129% between 2010-11 and 2014-15, the government share of revenues remained more or less static.”

“The negligence in laying down appropriate procedures and modalities and thereby laxity in getting the entire sales proceeds deposited into the State’s account amounted to undue favour to the lottery MAs besides continuously vitiating the provisions of the Act/Rules at the cost of the state’s interests,” it added.

The 2010 lottery rules clearly point out that these schemes should be run in order to help fund development activities of social importance. The CAG specifically calls out the Pawan Chamling-run government as failing to do this.

“Even basic objectives of running lotteries business, viz. carry out development activities and welfare schemes in Sikkim, were not fulfilled as no such schemes were ever drawn by the government, nor funded from the revenue earned from lottery,” it noted.

As a comparison, in 2015-16, the Kerala government earned Rs 7,300 crore by selling lottery tickets, out of which profit to state exchequer was Rs 2,200 crore. Much of this money has gone to specifically fund healthcare schemes that cater towards the state’s most vulnerable and marginalised.

Collusive bidding alleged

The CAG has also specifically looked at irregularities in the way Essel’s Pan India was appointed as a marketing agent in 2012.

According to the audit report, two companies submitted bids to a six-member tender opening committee set up by the state government in June 2012. They were Pan India Network Pvt Ltd and Tashi Delek Gaming Solutions.

However, upon discovering that the “two companies appeared to belong to the same parent organisation as indicated by their identical office addresses and closeness of offers of MGRs of Rs 10.05 crore and Rs 10.00 crore per year respectively”, the tender committee decided to reject the bids because there could be “implicit understanding between the two companies in offering the bids”.

Consequently, the tender committee decided that a fresh expression of interest should be floated after “exploring possibilities of increasing government revenue to the maximum from prospective marketing agents”.

The tender committee gave its recommendations to the state’s commissioner-cum-secretary (CCS) in the finance, revenue and expenditure department (FRED). The CCS, however, “without recording any reasons”, submitted an altogether different proposal to Sikkim’s chief secretary. The new proposal involved calling the two parties (Tashi Delek and Pan India) in for negotiation to enhance their bid amounts.

After being approved by the chief minister in October, 2012, both companies were called in but only Pan India Network agreed to raise its bid (from Rs 10.05 crore to Rs 10.50 crore).

“The CS after examining the slightly enhanced MGR offered by Pan India Network Pvt. Ltd. proposed to the CM on 20 October 2012 for calling of open tenders to get best MAs and reasonable revenue to the government. The CM approved the proposal of the CS on 1 November 2012,” the audit report notes.

However, on the very next day, November 2, 2012, notes the CCS submitted to the national auditor point out that “the matter was discussed with the CS” and that since tenders had already been invited earlier, the FRED could go ahead with the “execution of agreement with Pan India Network Pvt Ltd”.

The CAG, in its findings section, notes that “there was no real competition in the bidding and was a case of collusive bidding”.

“Despite disqualification of the tender and contrary to recommendation of the tender selection committee, M/s Pan India Network Pvt Ltd. was awarded marketing contract of Online Lotteries in November 2012 for five years. Reasons for rejection of the recommendations were also not recorded in the files produced for audit,” the report states.

“The department, inter alia, stated that the decision to award marketing contract of Online Lotteries to Pan India Network Pvt. Ltd. was taken in the best interest of the State as invitation of fresh bids would cause delay and loss of revenue to the State. The reply of the Department was not tenable as the tender committee had also recommended extension of agreement with the existing MA for a further one-year period for completing fresh tender process, to maintain continuity of flow of revenue to the state and thereby avoid loss to the State,” it added.

When the CAG asked about the possibility of collusive bidding, the Sikkim government department replied that the “two companies were separate entities with distinct corporate identity numbers and separate directors”.

However, as the national auditor noted, this reply “was not tenable” as the “two companies had the same office address, telephone number, same trademark of games captioned ‘playwin’ and the same authorised signatory”

Essel response

In response to a questionnaire sent by The Wire, however, Pan India Network officials denied any association between Tashi Delek and the Essel Group.

“At the present scenario, we deny the association of Tashi Delek with Essel Group. As has been informed to me, I bring it to your knowledge that there was a publication of the bidding in the prominent newspaper of India by State Government of Sikkim, and thus, there is no question of any collusive bidding,” Kinnar Chhaya, company secretary, said in a emailed response.

“It is specially advised to you to desist from committing an offence under the Indian Penal Code, under Section 499/500 etc., by publishing any defamatory article/story. It is expected that you shall desist from committing any illegal act under the law,” he added.

In July 2017, E-Cool Gaming, a company associated with the Essel group, filed a criminal defamation case in Aizawl against the The Wire, its editors and the author of an earlier story which drew on the CAG report on the lottery business in Mizoram. The Wire sought a quashing of the complaint on the ground that matters of record in the public domain carried in public interest cannot amount to defamation. The high court stayed the proceedings and E-Cool Ltd. decided to withdraw the case it had filed.