Minister of communications and IT A Raja lights a lamp as telecom secretary Siddhartha Behura (left), TEMA’s NK Goyal (centre) and others look on

Unjustifiable loss

Ravi Visvesvaraya Prasad | New Delhi | 27 October 2008 |

As CURRENT predicted, private players are raking in the moolah thanks to the largesse distributed by the telecom ministry

Union minister for communications and information technology A Raja is defending the indefensible. He is justifying his decision to allocate spectrum at a throwaway price of Rs 1,651 crore, which was the price of the fourth cellular licence way back in June 2001, when there were just four million mobile phone subscribers, one-hundredth of the figure now. The potential loss to the public exchequer of Raja’s decision to allot 120 telecom licences on a first-come first-served basis in January 2008, instead of auctioning the scarce spectrum, is over Rs 55,000 crore.

Raja is also making the extraordinary claim that the massive profits of over Rs 4,000 crore realized by companies such as Swan and Unitech by selling equity stakes are not due to his largesse. Raja actually said: “If Unitech or Swan sells its share for a price to a willing buyer then that is a business decision, and it is unfair to say that the money could have come to the government”.

Raja resorted to the high-faluting economic theory jargon of “Terminal Enterprise Value” to pull wool over the eyes of those who smelt crony capitalism at work. He said: “The valuation of a company can be on the basis of Terminal Enterprise Value, which includes acquisition of certain number of subscribers and generating certain revenue for the companies over a fixed period of time. Since the details of the agreement of sale in these two incidents are not available, it is not desirable to comment upon whether this valuation is on Terminal Enterprise Value or their present valuation”.

But neither of his assertions is true. The lucrative terms of the two deals have been proudly tom-tommed by Swan and Unitech (as predicted by CURRENT in the issue of October 27). Swan Telecom sold 45 per cent equity stake to the UAE-based Etisalat for Rs 4,100 crore ($900 million). This was Rs 2,563 crore more than the Rs 1,537 crore it paid to the government to acquire licences in 13 telecom circles in January 2008. Swan valued its enterprise value at over $2 billion.

Then Unitech sold a 60 per cent equity stake to Telenor of Norway for Rs 6,120 crore. Unitech had paid Rs 1,651 crore as licence fees for 23 circles in January 2008, and so has earned a neat 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 crore, which is more than the Rs 8,100 crore market cap of Unitech.

Minister Raja argued that these valuations were for infrastructure, towers, and subscribers. But this is just not true. Neither Swan nor Unitech has any infrastructure, equipment, network, telecom technology, knowledge of the telecom business, brand equity, goodwill, even a single customer, or even a single paisa in revenues at all. They are highly unlikely to even get any subscribers for at least another year. The only asset they have is the piece of paper called the telecom licence, and the associated 4.4 megahertz of start-up 2G spectrum.

Ironically, when the Department of Telecom will be auctioning 3G spectrum by January 2009, Raja argued against auctioning 2G spectrum to the new entrants, stating that if the spectrum were auctioned, “it would not have been possible to charge higher spectrum usage charges of the order of 2 to 6 per cent, and maintenance and administration cost, which is typically of the order of 0.5 – 1 per cent”. He further claimed that if the spectrum had been auctioned, the government would not have been able to impose rollout obligations, which in turn would have resulted in low rural telecom penetration.

But this is also not correct. The government imposes rollout obligations as part of the telecom licence. Last week, there was a proposal that operators who had a physical presence in more than 90 per cent of a circle should receive concessions in payment of licence fees. Moreover, even in the proposed 3G-spectrum auction, there is a spectrum charge of 1 per cent revenue share in addition to the auction amount.

The 120 licences issued in January 2008 earned the exchequer Rs 9,000 crore. The Swan and Unitech valuations have indicated that the value of 4.4 MHz of start-up spectrum should be over Rs 55,000 crore, an amount that would wipe out 60 per cent of India’s fiscal deficit.

This is when the global financial crisis has put a dampener on the proposed 3G auction scheduled for January 2009. Several large operators such as Vodafone have asked for the auction to be postponed since they would not be able to obtain financing.

An NGO, Telecom Watchdog, has demanded that the government take back the licences of the new 2G licences issued in January 2008. But if it goes to court, then developments in the telecom sector will further slow down.