Spectrum auction

Spectrum grab

Print edition : September 30, 2016

Relaince Industries Limited chairman Mukesh Ambani launching Jio 4G services in Mumbai on December 27, 2015.

A general view of Reliance Jio headquarters on the outskirts of Mumbai. Photo: REUTERS

The conduct of the spectrum auction, which was won by Reliance Jio for its services, raises disturbing questions about whether state policy is available for capture by big business.

IN THE aftermath of the 2G spectrum scam, which is possibly one of the biggest scams in independent India, auction of wireless spectrum was touted as a means of ensuring fair competition while safeguarding the state’s take from the allocation of a scarce public resource. This simplistic notion that a rule-bound regime will ensure fairness and transparency has suffered a major blow because of the manner in which Reliance Industries Ltd (RIL) acquired wireless spectrum on which rides Jio, its mobile subsidiary which began operations on September 5.

More than five years after the Central government’s auction of the Broadband Wireless Access (BWA) spectrum, questions about the fairness of the process remain unanswered. Three aspects of the process by which Reliance Jio acquired the spectrum and plans to use it raise grave misgivings about the Indian telecom regulatory environment 20 years after mobile telephony entered the country. The first pertains to how Jio acquired the spectrum in the first place; the second to how the norms relating to what it is to be used for were tweaked in a manner that apparently favoured Reliance; and, thirdly, how access to the block of spectrum given to Reliance gives it an unfair advantage vis-a-vis its competitors because it will pay less than what other operators pay to the government as spectrum user charges (SUC).

Even more disturbing is the fact that the Narendra Modi government has chosen to not correct the anomalies which admittedly were allowed to occur during the tenure of the previous Congress government headed by Manmohan Singh. To make matters worse, the anomalies pertain not merely to the grant of the spectrum but also to its usage charges. In effect, it is not just a one-time anomaly but one that will exist during the lifetime of the licence that has been awarded to Jio’s competitors.

The auction charade

The auctions for 3G as well as BWA/4G spectrum were conducted in May/June 2010, with the BWA auction taking place immediately after those for 3G. The auctions for the BWA spectrum were for two blocks of 20 megahertz (Mhz) of spectrum in the 2.3 Mhz band in each of the 22 service areas of the Indian telecom network. The government fixed a reserve price of Rs.1,750 crore for each block of spectrum in the specified band allocated for BWA/4G services. All the three categories of licence holders—Internet Service Providers (ISPs) providing Internet services through wireless or wireline technologies, cellular mobile telephone services companies that provide regular mobile services, and Unified Access Services (UAS) licence holders who can carry voice as well as Internet traffic were allowed to participate in the auction. However, it is important to appreciate the fact that the notice inviting applications (NIA) for auctions clearly stated that winning access to the spectrum “does not confer a right to provide any telecom services”. It is “governed by the terms and conditions of the licence obtained by the operator”, the NIA stated. It also specified the kind of use the allocated spectrum could be put to. It specifically ruled out the use of the BWA spectrum for carrying voice traffic.

The fact that the BWA/4G auction was conducted after the conclusion of the 3G auction may have left some of the players financially stretched, which probably explains to some extent their lukewarm response to the BWA auction; none of them bid for all 22 service areas, which would have ensured a pan-Indian presence in terms of spectrum availability. Curiously, in the absence of minimum norms for participation in the auction, a relatively minor player, Infotel Broadband Services Private Limited (IBSPL), won bids in each of the service areas, the only one to emerge with an all-India presence after the auction. This company, with a net worth of hardly Rs.2.5 crore and serving a single client from which it earned just a few lakh rupees, went on to win an auction in which the pan-Indian bid for 20 Mhz of spectrum cost Rs.12,847.44 crore, or Rs.642.39 crore per Mhz, indicates the limitless possibilities that the Indian regulatory regime offers corporates with the right connections.

The fact that IBSPL shares a common promoter with Himachal Futuristic Communications Ltd (HFCL), which gained notoriety in the late 1990s when it made sky-high bids for 2G spectrum but failed to do anything with the bids it won, obviously failed to set off alarm bells in the government. An auction process contaminated by the presence of such elements ought to have raised serious questions about the basic qualification of bidders, but this did not happen. Even more disturbing questions began to emerge when a “draft” report of the Comptroller and Auditor General (CAG) of India on the functioning of the Telecom Ministry surfaced in the media in 2014 indicating that bank guarantees for Rs.252.50 crore provided by IBSPL and issued by a private bank may have been forged. The auction concluded on June 11, 2010, and the following day an Inter-Ministerial Committee certified that the auction process was not vitiated in any manner that would have impaired competition. Reliance delivered its masterstroke when it took control of IBSPL in unseemly haste soon after the conclusion of the auction. On the day the auction ended, the tiny company gathered its shareholders and resolved to expand its authorised share capital from Rs.3 crore to Rs.6,000 crore; it dropped “private” from its name and also issued three-fourths of its shares to Reliance Industries Ltd., thus conveniently making itself overnight a subsidiary of India’s largest private conglomerate. This is the story of how Reliance Jio Infocomm Limited emerged from the shadows, threatening to launch a war in the Indian mobile telephony landscape.

The fact that all the major telecom companies, including Reliance Communications (under the control of Mukesh Ambani’s estranged brother Anil Ambani), Airtel, the biggest Indian mobile services operator, and Idea Cellular (from the AV Birla Group), stayed away from the BWA auction indicates that they did not see Reliance lurking in the background. Prabir Purkayastha, associated with the Delhi Science Forum and Free Software Movement of India, speculates that Reliance’s competitors were “clearly blindsided” during the auction process.

Tweaking norms

If the audacious manner in which Reliance won the spectrum was shocking, more was in store when it came to the question of what it was planning to do with a spectrum that was meant for data traffic. That was the second aspect of the unseemly controversy, one in which the regulatory framework has been repeatedly mocked at. In 2011, IBSPL applied for a licence to operate mobile and landline services across the country. Meanwhile, the Department of Telecommunications (DoT) and the Telecom Regulatory Authority of India (TRAI) were grappling with issues raised by the progress of 4G technologies (long term evolution, or LTE), which provided for the simultaneous usage of data and voice over the network. A DoT committee, which went into the issue in 2012, observed that the commercial integrity of the regulatory system required that auction participants clearly knew what each block of spectrum was meant for. The discussion within the government continued until 2013, when the government finally decided to allow the conversion of ISP licences to a unified licence. Not surprisingly, the first to get such a licence was Reliance Jio. The fact that Reliance had acquired spectrum that enabled it to carry voice, too, was estimated by the CAG in its “draft” report to cause a loss of Rs.22,842 crore to the government. It pointed out that in the process of the conversion of an ISP licence into a unified licence, Reliance had acquired spectrum for voice carriage at a price that was far lower than what its competitors had paid during the 3G auctions conducted in 2010. The third aspect of the unseemly affair pertains to the annual charges, specifically the SUC, that operators have to pay to the DoT. This is defined as a percentage of an operating company’s revenues. The DoT had fixed the SUC for the BWA spectrum at 1 per cent, ostensibly to enable wireless data connectivity in rural and remote parts of the country and to drive Internet penetration. Operators offering voice services on spectrum allocated to them pay between 5 and 8 per cent of their revenues, depending on how much spectrum they hold.

A major anomaly arises from the fact that although Reliance Jio’s operations rides these waves for carrying voice too, it will pay only 1 per cent of its revenues, much lower than what other operators carrying voice traffic will pay.

When the entire issue was challenged in the Supreme Court by the Centre for Public Interest Litigation, which was represented by the lawyer Prashant Bhushan, the court directed the government to re-examine the issue. However, the Modi government has chosen to ignore the issue. The fact that voice traffic is still the main source of revenue for telecom networks implies that Reliance will enjoy a significant advantage in the competition.

Policy capture

The saga of Mukesh Ambani’s second foray into the telecom business is an illustration of the lax regulatory environment, one in which policies are available for capture by powerful corporate interests. The rule of law and the laying down of norms are critical to fair competition. This is more so in the case of an industry such as telecom, which not only has a huge transformatory potential in terms of its social and economic impact but one that is characterised by rapid technological changes. Even though auctions were invoked as a mantra to settle the dust let loose after the 2G scam, it is evident that auctions without stringent oversight can allow for wrongdoing on a massive scale. The manner in which a small and unknown company, without the necessary financial wherewithal to undertake a nationwide rollout of 4G services, was allowed to hijack the entire auction exercise is in itself a mockery of regulation. Moreover, the auction process and the manner in which conditions and norms governing the use of the spectrum were tweaked indicate that the government actively encouraged an uneven playing field, which allowed Reliance Jio to not only marginalise its competitors but reduce the scope for competition for customers.

The courts have looked the other way as the various wings of the state have sent a clear and consistent signal, irrespective of which party is in power, that the weight of state policy is available for capture by powerful interests. Similar episodes, which have involved losses to the public exchequer and a sharp reduction in competition, have happened in the power, oil and gas sectors. That Reliance has a presence in all the three sectors is an indication of how liberalisation and capture of state policy have gone hand in hand.

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