Finance Ministry, TRAI nail Raja’s lies

It is time for telecom minister Andimuthu Raja to resign. As it is, he has become the butt of a joke doing the rounds in telecom circles, that DMK stands not for Dravida Munnetra Kazhagam, but for Delhi Money for Karunanidhi

Raja’s repeated denials that he has not done anything wrong in allocating licences and spectrum to six new players in January 2008 – at the same prices as prevailed in June 2001 have been publicly contradicted by both the Ministry of Finance as well as by the Telecom Regulatory Authority of India.

Raja publicly claimed at a press conference that he had the full backing of the finance minister, P. Chidambaram, in his decision to allocate spectrum on a First-Come First-Serve (FCFS) basis, rather than auctioning it. But the Finance Ministry immediately released a letter that the former Finance Secretary (and currently governor of the Reserve Bank of India) Duvuri Subbarao had written to the then Secretary of the Department of Telecommunications, Dinesh S Mathur, on 22 November 2007 when the telecom ministry had announced that they would sell licences at Rs 1,651 to whoever had submitted their applications by 25 September 2007.

Subbarao wrote: “The purpose of this letter is to confirm if proper procedure has been followed with regards to financial diligence. In particular, it is not clear how the rate of Rs 1,600 crore, determined as far back as 2001, has been applied for a license given in 2007 without any indexation…In view of the financial implications, the ministry of finance should have been consulted in the matter before you finalized the decision.”

Subbarao went on to instruct DoT to “kindly review the matter and revert to us as early as possible with responses to the above issues. Meanwhile, all further action to implement the above licenses may please be stayed.”

As soon as DS Mathur retired at the end of December 2007 and the present Telecom Secretary, Siddharth Behura, took over in January 2008, Raja swung into action. At 2:45 pm on 10 January, DoT posted an announcement on its website that Letters of Intent would be issued between 3:30 and 4: 30 pm on that day, and that the application fees would have to be paid then by demand drafts. Raja announced that spectrum would be allotted to whoever was the first to deposit the licence fee, even if the difference between two depositors was a fraction of a second.

This meant that the lucky winners would be whoever was able to prepare documentation of hundreds of pages and make a bank draft of Rs 1,651 crore and reach Sanchar Bhavan within 45 minutes. Or it would be those who possibly had advance information of Raja’s intentions.

Applicants had to collect LoIs from the second floor of Sanchar Bhavan, and race to the reception on the ground floor in order to deposit the fees there. Some companies hired goons to ensure that their competitors could not run down from the second floor to the ground floor before them. CEOs of several companies were physically dragged out of the line at the payment counter. The police had to be called in, where they manhandled senior executives of many leading telecom operators who had earlier attacked senior DoT officials.

The consequences of Raja’s decision broke into public view in October 2008 when Swan Telecom sold 45 per cent equity stake to the UAE-based Etisalat for Rs 4,100 crore (US$900 million), a whopping profit of Rs 2,563 crore for doing absolutely nothing other than grabbing a licence. Incidentally, Swan Telecom, promoted by real estate developers in Mumbai and Ahmedabad with absolutely no experience or expertise in telecom, was the fastest in depositing the licence fees of Rs 1,537 crores for 13 circles.

The scam perpetrated by Raja further intensified in early November 2008 when another real estate major, Unitech, which too had absolutely no experience and expertise in telecom, and which was facing severe financial problems in its real estate business, sold a 60 per cent equity stake to Telenor of Norway for Rs 6,120 crores. Unitech had paid Rs 1,651 crores as licence fees for 23 circles in January 2008, and so has earned a huge profit of Rs 4,469 crores. Unitech’s eight telecom subsidiaries will issue fresh equity to Telenor. The Rs 1,200-crore debt that Unitech had taken to buy the licences will now be transferred to the telecom venture. The Telenor-Unitech deal pegs the market value of the telecom venture at Rs 11,620 crores, which is much more than the Rs 8,100 crore market capitalization of Unitech. Raja’s claim that he had conformed to the recommendations dated August 28, 2007 issued by the Telecom Regulatory Authority of India were publicly contradicted by the chairman of TRAI, Nripendra Misra, who accused Raja of cherry picking TRAI’s recommendations. Misra pointed to section 2.73 of the TRAI’s August 2007 recommendations, which states: “In today’s dynamism and unprecedented growth of telecom sector, the entry fee determined then (2001) is also not the realistic price for obtaining a license. Perhaps it needs to be reassessed through a market mechanism…”

While TRAI’s recommendation is vaguely worded and does not explicitly recommend auctioning of the spectrum, it certainly indicates that spectrum could not be allocated in January 2008 at the same price that it was allotted in June 2001. This also contradicts Raja’s public statement that nowhere did the TRAI explicitly state that the price discovered in the 2001 auction should not be adhered to in future.

Misra opined that telecom licences should be auctioned rather than allotted on a FCFS basis. However, to the successful winners of licence auctions, the spectrum should be allocated on a FCFS basis. Misra stated that this was quite different from allocating spectrum on a FCFS basis.

Raja then argued that his decision to allot licences on a FCFS basis rather than holding auctions was based on the new National Telecom Policy of 1999.

Raja’s claim is specious. A decision of the Union Cabinet of 31 October 2003, when it introduced Unified Access Service Licences, had stated that all future licences should be auctioned. The Vajpayee cabinet had accepted TRAI’s recommendations on UASL. In section 7.39 of its recommendations on UASL, TRAI had recommended: “As the existing players have to improve efficiency and utilization of spectrum and if the government ensures availability of additional spectrum, then in the existing licensing regime, they may introduce additional players through a multi-stage bidding process as was followed for the fourth cellular operator.” This was accepted in toto by the Vajpayee Cabinet.

Moreover, the whole concept of FCFS has just been questioned in a Public Interest Litigation suit admitted in the High Court of Delhi, which will be heard on 10 December 2008. The petitioner, Arvind Gupta, has alleged that the FCFS criterion is arbitrary, and has questioned the very basis of allotment of new telecom licences in January 2008. The precedent that he relied on was Doordarshan’s allotment of time slots on satellite channels in the 1990s. In its verdict of September 21, 1993, the Delhi High Court ruled: “The basis of first-come first-serve for allotment of time slots on satellite channels is arbitrary. It is unreasonable, unjust and unfair.”

DoT’s counsel tried to argue that the High Court did not have jurisdiction, and that the Telecom Disputes Settlement and Appellate Tribunal was the appropriate forum to hear the matter. But the Delhi High Court bench consisting of Chief Justice A P Shah and Justice S Muralidhar turned him down and ordered the DoT to explain the implications of the FCFS policy within three weeks.

Raja then alleged that an “undeclared cartel”  – implying the Cellular Operators Association of India – was behind the criticism against the FCFS basis of spectrum allocation. He further indicated that the existing GSM players did not want fresh competition to come in. He released a list of existing GSM operators, who were allotted spectrum on a FCFS basis as late as 2007, at the 2001 price.

This not entirely true, as it hides important facts. Spectrum allocation to old GSM operators (licensed before 2001) is governed by a contract they signed with the DoT on 29 March 2006. This contract was a settlement supervised by the Supreme Court, whereby the old GSM operators and the government withdrew all litigation and monetary claims against each other. Moreover, the old GSM operators had lost several of their contractually guaranteed privileges when the Vajpayee government introduced Unified Access Services Licencing and regularized Wireless in Local Loop to full mobility in 2003, both as policy decisions. The old (pre 2001) GSM operators sued the Vajpayee government, which went all the way up to the Supreme Court. The Supreme Court worked out a settlement by which up to 12.4 MHz of spectrum was to be allotted to old GSM operators on a revenue-sharing basis subject to their achieving certain levels of subscribers.

But this settlement does not apply to new licencees. The Vajpayee cabinet’s decisions of October and November 2003, as well as all subsequent recommendations of TRAI, make it clear that all new telecom licences should be allotted only by auction. Auctions were also suggested for issue of spectrum to old GSM licences beyond 12.4 MHz.

Raja is pulling wool over the nation’s eyes by falsely passing off contracts which govern old GSM operators as pertaining to the new licences which he issued in January 2008. This is totally wrong, and contradicts the numerous recommendations issued by TRAI.

After the furore broke over the Swan and Unitech deals, on 11 November 2008, the Finance Ministry asked the Department of Telecom to collect a spectrum transfer charge from promoters of new telecom companies who sold their equity stakes. This proposal of the Finance Ministry means that a promoter who intends to sell his equity in a telecom operator to another entity, would have to first give a fee to the Government before he can be permitted to complete the deal.

DoT also proposed to ban promoters from selling their shares and issuing special dividends for a 3-year period. But the Finance Ministry wants the clause on spectrum transfer fees to be included to act as a deterrent against direct equity sales by promoters even after the lock-in period expires.

However, new telecom companies which bring in a strategic investor by issuing fresh shares will not be asked to pay this fee. This means that even if the Finance Ministry’s proposals are accepted, it will have no impact on the Unitech-Telenor and Swan-Etisalat deals since both have been done through issue of fresh equity shares.

The six new licencees in January 2008 paid Rs 9,000 crores to the government as licence fees. But Swan has valued itself at Rs 9,400 crores and Unitech at Rs 11,620 crores. So the market value of the six new licences is approximately Rs 60,000 crores. Minister Raja’s refusal to apply his mind has led to a loss of at least Rs 51,000 crores to the national exchequer. Moreover, being contradicted in public by civil service officials and statutory authorities like TRAI has made Raja’s position untenable.