Licence issue and transparency: a cautionary tale

Citation

Curwen, P. (2012), "Licence issue and transparency: a cautionary tale", info, Vol. 14 No. 1. https://doi.org/10.1108/info.2012.27214aaa.002

Licence issue and transparency: a cautionary tale

Article Type: Rearview From: info, Volume 14, Issue 1

A regular column on the information industries

Peter CurwenVisiting Professor of Telecommunications at the Department of Management Science, Strathclyde University, Glasgow, UK.

It is helpful to pick up this story in September 2010 when the Supreme Court in India issued a notice to the Minister of Telecommunications, Andimuthu Raja, concerning the issue of 122 mobile licences in January 2008 which, it was alleged, had cost the government INR700 billion ($15.1 billion) in foregone revenue. This extraordinary sum arose from the fact that the Department of Telecommunications (DoT) had chosen to allocate pan-India 2G (Unified Access Services) licences to nine operators for INR16.5 billion apiece, a fee originally set in 2001 when subscriber numbers were much lower, in the face of demands by parties such as the Ministry of Finance that the licences be sold at auction.

Aside from the Supreme Court, the matter had attracted the interest of the Central Bureau of Investigations (CBI), the Enforcement Directorate (ED), the Central Vigilance Commission (CVC) and the Comptroller and Auditor General (CAG) which had estimated the loss at a mere INR260 billion. However, the DoT had stuck to its view that issuing cheap licences had been the best way to bring down prices to consumers and to ensure that new operators entered the market.

In mid-October, the CAG informed the DoT that one such new entrant, Loop Telecom, should not have been awarded a licence because its Memorandum of Association failed to specify that its business was in telecommunications and its authorised share capital fell far short of the minimum specified. The CAG alleged that this was a case of “deliberate misrepresentation” on the part of Loop and was done with fraudulent intent. Furthermore, another operator, the Essar Group, was alleged to be a financial backer of Loop, thereby contravening rules on the scope of cross-ownership among operators.

By mid-November the CAG had escalated the controversy, now claiming that the loss was INR1.8 trillion ($40 billion) on the grounds that new entrant S-Tel (later to become Sistema Shyam TeleServices) had told Mr Raja of its willingness to pay INR137 billion for a licence. It also alleged that four more new entrants had been ineligible, namely Datacom (later to become Videocon), Loop, Swan Telecom (later to become Etisalat DB) and Unitech Wireless (later to become Uninor). For its part, the ED was also involved in investigating whether foreign shareholdings in new entrants were legal.

With allegations of corruption now dominating the news, Mr Raja, his conscience apparently clear, duly handed in his resignation and the Prime Minister temporarily took over his portfolio. The regulator, the TRAI, recommended that the 62 licences owned by the allegedly ineligible operators be returned – subsequently also questioning licences issued to Aircel, Allianz Infratech and Dishnet Wireless – while the Supreme Court, for the first time in its history, rebuked the Prime Minister for neglecting the matter until it had reached crisis point.

In the face of stonewalling by the ruling Congress Party, the Supreme Court instructed the CBI to continue its investigations and to report back in February 2011. In January, the new Minister of Telecommunications, Kapil Sibal, claimed that estimates of lost revenue were “completely flawed” because, for example, standard procedure was to issue start-up spectrum of 4.4 MHz for new entrants at no charge. Also in January, the (now 11, including Vodafone Essar, Tata TeleServices and Idea/Spice) operators threatened by loss of their licences appealed to the Supreme Court, which in turn demanded that the TRAI investigate alleged infringements of roll-out obligations by the licensees which had been made made by the independent Centre for Public Interest Litigation.

By this point it was becoming difficult to discern who was being accused of what, although the evidence was felt to be sufficient to arrest Mr Raja and two associates, but it appeared that further allegations had been made to the effect that the application date for UAS licences had been arbitrarily brought forward to favour particular early applicants. In early February, the CBI announced that it had singled out the former Swan Telecom and Unitech as particular beneficiaries of the date change. Meanwhile, a completely separate allegation of corruption was made in relation to the award of S-band (satellite) spectrum to Devas Multimedia in 2005 which, in the absence of an auction, had allegedly cost the government a further loss of revenue of INR2 trillion ($44 billion).

The TRAI now proposed that massive increases in one-off and annual spectrum fees be introduced, precisely at a time when fierce competition, largely the result of an over-supply of operators combined with cheap licence fees, had led to rock-bottom prices and rapidly diminishing profitability.

In April, five senior executives from Reliance Telecom, Swan Telecom and Unitech were sent to judicial custody charged with cheating, forgery and abetment to crime, bringing the total of those arrested to 11. In the case of Reliance, the accusation concerned an undisclosed illegally excessive stake in Swan Telecom at the time that it was awarded its licence. Reliance both denied this and alleged that the 2G incumbents in 2008 had covertly acquired excess spectrum before selling stakes to foreign partners at inflated prices.

By May, inter-agency disputes were surfacing on many fronts. For example, the DoT sought to cancel 15 licences for breaches of roll-out obligations whereas the TRAI wanted to cancel 60. According to the DoT, the TRAI’s methodology was flawed because it started counting when the licences were awarded instead of when the spectrum was handed over.

In a fascinating volte-face in early July, the government accused the BJP-led opposition of committing precisely the same irregularities of which it stood accused by the BJP, namely that while in office from 1999 to 2004 the BJP had allowed operators to pay a pre-determined share of revenues in return for being allocated licences rather than putting the licences up for auction. The loss was allegedly INR300 billion ($6.8 billion).

As things stand (in mid-August) 15 arrests have been made so far but the investigations have been extended back to 2001 and further charges are shortly to be brought against Essar/Loop. The Supreme Court has instructed the government to set up a special court dedicated to resolving the issues and the CBI, the ED and two separate panels of lawmakers continue their investigations. The latest allegation claims that the former founder of Aircel was forced by the then Minister of Telecommunications, Dayanidhi Maran, to sell his company to Maxis Communications of Malaysia in 2006 as a pre-condition for permission to expand its services.

What conclusions should be drawn from this saga? The obvious one that doing business in India may involve “irregular” practices and the movement of brown envelopes between parties is hardly a revelation.

But consider this. Every new entrant stands accused of underpaying for its licences. Many stand accused of obtaining licences by corrupt means. Many stand accused of not meeting roll-out obligations. Almost every new entrant in which a domestic or, especially, a foreign company has taken a stake stands accused of breaching cross-ownership rules. Many politicians, businessmen and civil servants involved in licence award processes over more than a decade stand accused of corruption. And a large chunk of the telecommunications rule book needs to be rewritten. Meanwhile, operators are being fined for “suspected contraventions” of laws and asked to explain why they should not pay, which is hardly good legal practice. Finally, and this is no minor matter, there are so many different agencies involved in sorting out the mess that they are inevitably coming to blows – almost literally at times since in December 2010 the floor of Parliament was filled with bellicose politicians and business had to be adjourned for a week.

How long will it take to unravel? Who will end up with 3G licences? Will 4G licences ever be awarded? How will competition be affected? How many new cases will end up in court? Will anyone actually go to jail, bearing in mind that a former Minister of Telecommunications was indicted in 1996 for corruption (seems to go with the job) and the first of his many cases ended with his conviction only in 2009? Who knows?