Fixing responsibility

The CAG report on the allocation of 2G spectrum licences indicts the Department of Telecommunications for gross violations.

THE disruption of parliamentary proceedings in November over the 2G spectrum allocation was further proof that the allegations of corruption plaguing the United Progressive Alliance (UPA) government's second term were far from over. The Union government had to force the resignation of Telecom Minister A. Raja for his alleged involvement in the scam although senior Congress leaders kept saying that the final report of the probe by the Central Bureau of Investigation and the Enforcement Directorate into the improper licensing of 2G spectrum might not come before early next year.

The distribution of 2G licences to telecom companies by the Department of Telecommunications (DoT) has been in question since 2008, but what triggered the recent pandemonium in political circles was an audit report on the allocation of 2G spectrum submitted to the government by the Comptroller and Auditor General of India (CAG). This was subsequently tabled in Parliament.

In its report (https://www.cag.gov.in/html/reports/civil/2010-11_19PA/contents.htm), the CAG has said that the licences were given at throwaway prices, ignoring the advice of the Prime Minister and the Ministries of Law and Finance. The DoT apparently also ignored the recommendations of the Telecom Regulatory Authority of India (TRAI) in August 2003 which had chalked a road map for the allocation of licences. These discrepancies cost a presumptive loss of Rs.1.76 lakh crore to the national exchequer. The audit report also indicates that the DoT did not follow the government allocation rules, ostensibly to benefit a few companies. In this context, the CAG points out that 85 of the 122 new licences issued in January 2008 were given to companies that did not even meet the prescribed DoT eligibility criteria.

Nine real estate companies misrepresented facts to get the spectrum, the report says. A major real estate company, the Unitech group, submitted applications for spectrum under six newly incorporated companies. Some of the beneficiary telecom companies in question are Shipping Stop Dotcom Pvt Ltd (now Loop Telecom), Allianz Infratech (which later merged with Etisalat DB Telecom), Swan Telecom (now Etisalat DB Telecom), Datacom Solutions (now Videocon Telecommunications) and S Tel. All these companies were allocated 2G spectrum despite not having the minimum paid-up capital required to get the licences. Allianz Infratech Private Limited submitted an application that did not even include the telecom sector in its main object clause. So, the CAG report says, its application should have been rejected immediately.

120 licences on a day

The audit covers the period 2003-04 to 2009-10. The report states, In January 2008, [the] Department of Telecommunications issued 120 new licences for unified access services [UAS] on the same day. These licences were issued at a price which had been discovered in 2001. Issuance of 120 licences in just one day and at a price discovered in 2001 has drawn the attention of media, Parliament and informed members of the civil society. Questions have been raised regarding the transparency in the allocation process and the failure in maximisation of revenue generation from the allocation of spectrum, which is a national asset. This department had been receiving innumerable references from Members of Parliament and other sources repeatedly, questioning the allocation process and the price fixed for such allocation. The claim in each such reference is that ineligible applicants seem to have been granted licences and at a price which appeared far below what has been perceived to be the appropriate market price in 2008. It was in this context that this department felt that there was a sufficient justification to review the entire process of issuance of licences, award of spectrum and the implementation of the UAS regime.

The telecom sector has seen a rapid transformation in a short time. In the two decades since the National Telecom Policy-94 set the stage for the opening up of the sector, the number of cellular phone services has outgrown fixed line services, and India has become one of the world's fastest-growing markets for mobile phone services. The most important change was the shift to a revenue-sharing regime in the National Telecom Policy in 1999, where the operators had to share their revenue with the government in the form of annual licence fees and spectrum charges. The introduction of Unified Access Services Licence (UASL) 2003 under NTP-99 sought to frame the road map for a uniform licensing regime.

Undue favours

Rekha Gupta, Deputy CAG, told journalists that the Anil Dhirubhai Ambani led-Reliance Communications appeared to have got undue favours in the allocation of licences and the DoT appeared to have sided with existing operators such as Bharti Airtel and Vodafone-Essar by giving them additional spectrum at prices much below the market rates. She said that Swan Telecom, which was also allocated spectrum, appeared to be acting as a front company for the Anil Dhirubhai Ambani group (ADAG). At the time of applying for the licence, the equity stakes of Reliance Telecom Ltd (RTL) in Swan Telecom was 10.71 per cent, which was against UAS rules. (According to rules, companies with spectrum interests cannot have more than a 10 per cent stake in another company.) Rekha Gupta said this meant the process by which Reliance Communications was given a dual technology licence lacked transparency and fairness and denied other similarly placed operators, including Tata Teleservices, equal opportunity, as they could apply for the use of dual technology only after the formal announcement of the policy. However, the ADA group has stated that at the time of issuing licences, its stake in Swan Telecom was less than 10 per cent.

Similarly, the Vodafone-Essar group was also found to have a more than 10 per cent stake in Shipping Stop Dot Com. Now Loop, it has not started operations in India, and both Reliance and Essar have stakes in it.

The CAG report says that the Unitech group, which was primarily a real estate company, bid for and subsequently received a nationwide spectrum licence. This is against the UAS rules as bidding companies need to list the telecom sector in the application's main object clause. The report says that Unitech had applied through six group companies. Unitech subsequently sold equity to a Norwegian telecom company, Telenor (the merged entity is known as Uninor).

The CAG also points out that spectrum allocation to existing operators was beyond the contracted quantity of 6.2 MHz. It has found Bharti Airtel, which received 32.4 MHz, to be the biggest beneficiary among private players, followed by Vodafone-Essar with 19.6 MHz, Idea with 12.6 MHz, and Aircel with 3.6 MHz. Thus, while the DoT, on one hand, was not processing pending applications for licence due to non-availability of spectrum, on the other hand it was allotting spectrum to existing operators beyond the contracted limit without any upfront charges being imposed or without determination of market price of spectrum, the report says. Where the government could have earned over Rs.36,993 crore if it had sold this spectrum at current market value, the exchequer got just Rs.2,561 crore.

This is a major departure from the prescriptions of the UASL approved by the Council of Ministers in 2003. The UASL had to be implemented in two phases. The implementation of UASL regime was to be carried out in two phases with [the] first phase of six months assigned for migration of already existing Basic Service Operators (BSOs) and Cellular Mobile Service Operators (CMSOs) to the new regime. The entry fee for migration of BSOs was determined as the fee equal to what was paid by the fourth cellular operator introduced through multi-stage bidding process in 2001. CMSOs were not required to pay any entry fee for migrating as they had already entered the market through a bidding process and thus paid a market-determined price. The second phase was to start after the first phase in which a unified licensing regime, with a nominal entry fee for the licence with the spectrum being charged separately, was envisaged, the report says.

However, the audit examination found out that the DoT had not implemented the licensing regime as approved by the Cabinet, and had implemented only the first phase of the policy. The Ministry of Finance was authorised by the Cabinet decision of 2003 to participate in the discussion for the efficient allocation of spectrum and price fixation, but the DoT decided not to associate the Ministry of Finance. As a result, the allocation of spectrum was done by the DoT at prices determined in 2001, which were based on a totally nascent market. The substantial transformation and growth experienced by the sector over the last decade was, therefore, not taken into account when allocating prices.

The entry fee of 2001 adopted for the migration of existing service operators was extended to the new operators without a decision on the determination of spectrum prices. The decision of the Cabinet in 2003 for the DoT to discuss spectrum pricing and the efficient allocation of spectrum with the Finance Ministry were ignored despite the Finance Ministry's advice, due to which the UAS licences continued to be awarded in 2008 at a price discovered from a nascent market of 2001. The report also brings out that the procedures adopted by the DoT for the award of 122 new licences in January 2008 had various flaws, Rekha Gupta told the media.

The report states that the DoT not only overruled the directives and notices of many Ministries involved in the allocation process but also did not inform the High Powered Telecom Commission, which included representatives of the Ministries of Finance, Industry, and IT, and the Planning Commission, about the TRAI recommendations. The TRAI report of August 2007 had recommended no cap' on the number of licences in any service area. Despite this recommendation of TRAI, the DoT issued a press release on 24th September 2007 stating that applications for issue of licences would be accepted only up to 1.10.2007. This action, in effect, conveyed fixation of an artificial cap in the number of licences to be awarded. However, in its response (July 2010) to the report issued to the Ministry (July 2010), the Ministry has stated that it accepted the recommendation of no cap' by the TRAI in October 2007. It seems that the Ministry, by issuing the press release in September 2007, had, in effect, circumvented the recommendation of TRAI by taking an action counter to the recommendation and its acceptance by DoT in October 2007. To further compound the earlier decision, of restricting consideration of applications received up to 1.10.2007, the DoT further advanced this date to restrict issuance of Letters of Intent (LoIs) only to applications received up to 25.09.2007. This was ostensibly to avoid legal implications in view of the shortage of spectrum for GSM services, the CAG report says.

The report also states that the DoT violated the internal principle of first come first served' adopted by it. Consequently, the process followed by the DoT for verification of applications for UAS licences lacked due diligence, fairness and transparency, leading to the granting of licences to ineligible applicants. The report mentions that on November 5, 2007, through a letter addressed to the Prime Minister, a prospective licencee named S Tel applied for UAS licences in July/September 2007, and offered to pay a higher price in the shape of an additional revenue share for the next 10 years. The offer was enhanced by the firm with a promise to revise it further upwards in case of any counter bid. If the prices offered by the company are taken as the basis, the report says, the value of the 122 new licences and 35 dual technology licences issued (after discounting for the receivables in future years) works out to Rs.65,909 crore as against the Rs.12,386 crore actually received.

Similarly, spectrum was allotted by the DoT to existing operators beyond the contracted limits without imposing any upfront charge for such allotment. This was also against the UASL principle. The value of spectrum held by 13 operators for 51 circles based on the 2001 rates works out to Rs.2,561 crore whereas according to current market prices the value would be in the range of Rs.12,000 crore and Rs.37,000 crore, the report says. Rekha Gupta said the figure of Rs.1.76 lakh crore was reached on the basis of the 3G auction held earlier this year in which the government got over Rs.67,000 crore.

The report makes the final dent in the legitimacy of the entire allocation process by saying that it does not withstand scrutiny, and hence the widely held belief that it has benefited a few operators and has not been able to maximise generation of revenue from the allocation of such a scarce resource. This has now been confirmed in audit. The role of TRAI would also appear to have been reduced to that of a hapless spectator as its recommendations were either ignored or applied selectively, it says.

The Supreme Court declared the telecom scam as India's most shameful scam. What the CAG report points out, clearly and strongly, is the unholy nexus between government departments and corporate lobbies and its consequences.