The report dealt exclusively with the running of the Nagaland State Lottery, of which Subba's company, M.S. Associates, had been appointed the State Sole Distributor (SSD) in 1994. For the IT officials, it was green on go. On June 23 raids were conducted in 50 locations in Delhi, West Bengal and Assam, the bastions of the lottery king and his associates.

Sack-loads of documents were picked up and Finance Ministry officials claim some `subsidiary' scams involving several politicians and industrialists have been unearthed. The CAG report, which is to be tabled in the state Assembly later this month, alleges thatevery `conceivable transgression' took place in the running of the Nagaland Lottery.

Apparently, the state government earned only `minuscule' revenues from the lottery, which has been running for four years and has a turnover of thousands of crores of rupees. Every rule in the book was flouted by the SSD. Besides the losses to the state government, the SSD also ripped off the public. While 91 per cent of the face value of tickets was to be paid as prize money, only 78 was actually given away. The winners were cheated of Rs 5,000 crore. `In the absence of any evidence to the contrary, it can be assumed that this amount was not paid as prize money and was retained by the distributor,' the report says.

The audit began in 1997, a marathon exercise scrutinized the running of the Nagaland Lottery from 1993 to 1997. In these years, 83,254 draws of the Nagaland Lottery were conducted, of which 42,459 draws were examined.

The Nagaland Lottery was floated in 1971 to ``help mobilize additional resources for thedevelopment process'' in the hill state. In 1994, following a Supreme Court ruling on the running of lotteries, the state government amended its agreement with Subba's company and violated the apex court's directive on several counts. The most glaring omission: the agreement was silent on the sharing of net profits between the state government and the SSD. As the report notes, `an agreement should be drafted to ensure that all loopholes are plugged to allow no room for misinterpretation.'

But even in 1994 when the seeds of the scam were sown the state Law Department had pointed out anomalies in the agreement, only to be overruled by the state Finance Department. The Law Department, for instance, said that the specific number of tickets issued per scheme per draw per day was not mentioned in the agreement. The CAG scathingly noted that this, ``only reinforces the feeling that the agreement was deliberately left unclear and with loopholes to benefit the SSD.''

The report reveals that despite a October1997 Presidential ordinance banning single-digit lotteries, the Nagaland Lottery continued to give out prizes in this category. Evidently, Subba and his managers treated the lottery as their personal fiefdom and were never questioned by the state government.

The CAG has calculated that of the Rs 38,297 crore worth of tickets printed, even a mere 2 per cent of profits for the distributor, agents and the state government works out to Rs 766 crore. Even if the state government was to get half the share of profit, it should have been entitled to Rs 383 crore. In fact, it received only Rs 40.20 crore. Besides, the Directorate made a practice of first depositing the receipts in a saving bank account for upto seven months before submitting them to the treasury.

The direct involvement of Chief Minister S.C. Jamir in the scam stands exposed. In September 1995, he personally approved the reduction of guaranteed return from Rs 6,000 without consulting the Finance Department. `This arbitrary and unathorised actionof the CM led to a loss of revenue of Rs 974 lakh between 1995-1997,' the report notes. When questioned on this aspect, the Finance Department later said that the reduction was done after carrying out a market survey and was necessary since the lottery business had reached a ``nadir''.

However, the auditors point out that the sharp increase in the number of draws did not point to a fall in business. Even if that were the case, it would have been more appropriate for persons running the lottery to increase the guarantee money rather than reduce it.

From the printing presses, the CAG learned that excess tickets for the Nagaland Lottery were being printed. For instance, in one draw for the `royal' series in November 1997, 46 lakh tickets were approved but 56 lakh were printed. Shockingly, a number of prize-winning tickets were not from the approved tickets put on sale. `Such excess printing of tickets and their marketing would not have been possible if the Directorate had exercised checks' the reportnotes.

Random checks also showed that the prescribed formula for announcing prizes was blatantly flouted. For a draw of the Lions Super Bumper, prizes were declared on a five-digit number though results were to be based on a six-digit number. While the auditors declared these to be `malpractices' the managers of the lottery dismissed them as `clerical errors.' On several other occasions, scheduled draws of the lottery were cancelled by M.S. Associates, never to be heard of again. Checks at printing presses showed that for as many as 469 draws involving a turnover of Rs 254 crore, tickets were sold but draws never held, denying the state government Rs 18.82 crore in revenue.

CAG auditors concluded that the prizes accruing to members of the general public were very low and that a `major chunk' went to persons connected with the lottery trade, such as main agents, stockists, super tickets and gold tickets, but no details were forthcoming from the company on who these categories of winners were. It was thusnot clear whether these categories of persons actually existed.

In the 42,459 draws scrutinized, 78 per cent of the prizes were `heavily' loaded in favor of the distributors, M.S. Associates. These were the non-taxable prizes (Rs 5,000 and below) which were directly under the control of the distributors and for which no accounts needed to be submitted. Cash books of the Nagaland Lottery show that a negligible fraction of the taxable amount of Rs 5.9 crore was actually paid and the company said it could not account for the rest. The missing money totalled Rs 5.4 crore.

As for the non-taxable prizes, which accounted for 90 per cent of prizes, the auditors found not a trace of accounts. But only a very negligible percentage of turnover was paid as prizes on both prize-winning tickets and seller prizes in the case of bumper lotteries. The total prize structure printed on the tickets for any draw was much more than what was permissible under Government of India guidelines.

Finally, the CAG discovered thatthe lottery managers were regularly skimming prize money for office expenses up to 40 per cent in some cases. On account of this, an additional Rs 5.2 crore was collected by M.S. Associates, described in the report as embezzlement of public funds. The CAG therefore said it had ``serious reservations about the actual payment of the entire amount of prize money and genuineness of the receipts.''