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2G spectrum scam: continuing controversy

December 15, 2010

Andimuthu Raja’s ignominious ouster as minister for communications and IT last month has stirred up a hornets’ nest. A series of controversies, scams and allegations have scorched the telecom landscape since then. Leaked recordings of lobbyist Niira Radia’s telephone calls compromising leading businesspeople, politicians and journalists; a bitter spat between dual-technology and GSM operators over spectrum hoarding and exaggeration of subscriber numbers; CBI raids on Raja’s residence; and new operators not fulfilling their rollout obligations – the litany of sector woes just keeps getting longer. Expectedly, the telecom industry is in tumult.

The report of the Comptroller and Auditor General (CAG) confirming what was already known – that Raja had in 2008 presided over the sale of 2G mobile licences at throwaway prices (fixed in 2001) – flipped open a can of worms.

At the time, the government had awarded 122 new telecom licences to nine operators and 38 dual-technology licences bundled with 4.4 MHz of start-up spectrum for Rs 16.51 billion each. This, according to the CAG’s calculations, deprived the exchequer of an estimated Rs 1.76 trillion. This figure is based on the amount raised from the recent 3G spectrum auction and the price quotations submitted by some of the operators who did not get licences.

To make matters worse, the licences were given away for a song to operators who did not meet the eligibility criteria. Further, according to the CAG report, the sale of 2G licences on a first come, first served basis was a complete sham.

In effect, the CAG report says that 2G licences (over 100 licences were awarded in a single day) were handed out in a murky and inconsistent manner, at times to companies that had reportedly doctored essential documents in order to obtain the licences. A case in point is Etisalat DB (formerly Swan Telecom), which received undue advantage despite its application being ineligible as per the cross-holding norms.

In total, the CAG found that 85 of the 122 licences given to six companies – Uninor, Videocon, Loop Telecom, S Tel, Swan and Allianz Infratech – were illegal as these firms did not fulfil the eligibility criteria. The report was uncompromising and unequivocal in its condemnation of Raja. It stated: “The ex-minister has flouted every canon of financial propriety, rule and procedure.”

Damage control 

By end-November, the telecom scam was spinning out of control and threatening to cripple the morale of the industry. Prime Minister Dr Manmohan Singh got dragged into the controversy with the Supreme Court chiding him for not sanctioning the probe against Raja earlier.

To control the damage, Kapil Sibal was brought in as the new minister for communications and IT. Known to be clear thinking, efficient and competent, Sibal was hand-picked to spring-clean the mess Raja had created. His job is to allay the regulatory uncertainties being faced by the sector and restore industry confidence.

Today, even as further investigations continue on the 2G licensing issue by various agencies including the Enforcement Directorate, the Income Tax Department and the Central Bureau of Investigation (CBI), the telecom ministry has initiated steps to undo the damage.

Promising to take action against erring companies that had been allotted 2G mobile licences in 2008, the ministry has started issuing show-cause notices to the six firms holding 85 of the 122 licences for suppressing information and forging documents. Another set of notices is likely to be issued to operators who have failed to roll out services in the stipulated one-year period. This decision has been based on the recommendations of the CAG and the Telecom Regulatory Authority of India (TRAI), asking the government to review and even cancel the licences issued by Raja under controversial circumstances.

The firms in question will be given 60 days to reply to the notices. Thereafter, the government can impose penalties or cancel their mobile permits based on the companies’ response.

Meanwhile, the government has asked the corporate affairs ministry to determine if the Dubai-based Etisalat DB, which has licences to operate in 15 circles, is in fact a front company of the Anil Ambani Group, as claimed by the CAG report.

Sibal has also signalled a comprehensive review of the telecom policy, which will primarily aim to address the perception of widespread corruption in the telecom ministry. On an immediate footing, the government has set up a one-man committee under former Supreme Court judge Shivraj Patil to examine the allocation of all telecom licences and spectrum from 2001 to 2009. This will not only widen the probe, but will also help the government to closely examine any lapses and violations in policy. “It will help us see if the procedures adopted by the ministry were fair and transparent. It will also suggest remedial measures,” says Sibal.

The former judge is expected to complete his enquiry by end-January 2011. And if it is found that any company had furnished wrong information, their licences could be cancelled.

The minister, however, has an issue with the CAG’s estimate of the loss to the exchequer. According to Sibal, the loss amount, pegged at Rs 1.76 trillion, is “presumptive”. The Department of Telecommunications (DoT) is, therefore, to start an exercise to arrive at the actual figure. This will be done after determining the net present value of the licences. “Since there was no auction of 2G spectrum, it is not easy to determine its market value. A large number of people have been granted 2G licences with an entry fee of Rs 16.51 billion. We now have to determine what will be the share of revenue the government would have got over a period of 20 years [the licence period] and then arrive at the correct value,” Sibal stated.

Rollout blues 

One aspect of the 2G licence giveaways that had irked many incumbent operators and also come to the notice of telecom analysts, the CAG, the CBI, and others was the fact that after buying licences cheap, companies like Swan and Unitech that had not rolled out services were able to sell stakes to international telecom majors like Etisalat and Telenor for a whopping amount. For instance, in 2008 itself, soon after receiving the spectrum, Swan Telecom managed to sell 45 per cent stake in the company to Etisalat for Rs 41.4 billion.

“These high valuations seemed unrealistic at the time and further enhanced the fact that the government had sold licences cheap,” says Dr Mahesh Uppal, director, ComFirst.

Further, according to DoT which has been carrying out a field survey to assess the fulfilment of rollout obligations, it seems that new operators like Uninor, Videocon, Loop Telecom, S Tel, Sistema Shyam TeleServices Limited (SSTL) and Etisalat DB have failed to roll out services within the stipulated one-year period.

According to the 2G licence agreement, operators were required to roll out mobile services in 90 per cent of the service areas in the metros and 10 per cent of the service areas in the district headquarters within 12 months of receiving spectrum. However, TRAI points out that Etisalat DB, Videocon and Loop have negligible or no subscribers in the majority of their circles even today. Loop, for instance, has a negligible subscriber base in all circles expect in Mumbai, where it has inherited BPL Mobile.

Since the operators have failed to meet the licence conditions and have not effectively utilised the scarce spectrum, TRAI has advocated that their licences be cancelled. This would impact Etisalat in at least 15 circles, Loop in 20 circles, SSTL in 11 circles, Videocon in 10 circles and Uninor in eight circles.

Market analysts, however, do not believe that the government will eventually cancel the licences of the erring firms, especially because some operators like Uninor and SSTL have a reasonable user base. Instead, what is more likely is that the government will impose retrospective fees on companies that received 2G licences cheap in 2008. The current thinking is that the government will charge operators up to Rs 700 million as liquidated damages for failing to meet their commitment as per the licence terms and conditions.

In an interesting aside, new operators facing termination or high penalties for missing their rollout timelines need to undertake urgent damage control. Telecom operator Etisalat DB, for instance, which is yet to roll out services in any circle, has put up hoardings at strategic locations in Delhi claiming to have soft-launched GSM services in all its 15 circles, including Delhi, in June this year under the brand name Cheers.

Commenting on this, a telecom analyst from Anand Rathi Securities says, “Though these operators are yet to roll out services, if they are claiming to have soft-launched these already, it is likely that they will now do so in a hurry, given the pressure that is building up.”

Spectrum hoarding and war of words 

Another issue that the CAG report has highlighted is that some incumbent operators have been allocated spectrum beyond the contracted amount. This pointer could definitely work against operators like Bharti Airtel, Vodafone Essar and Idea Cellular, which have more than 6.2 MHz spectrum (the contracted amount) in many circles.

Meanwhile, even as the incumbents are claiming that there has been no violation of their licence terms in getting additional spectrum, there is a war of words raging among them currently. The older GSM operators and dual-technology (GSM and CDMA) players like Reliance Communications (RCOM) and Tata Teleservices Limited (TTSL) are engaged in a duel on the issue of spectrum hoarding and efficient utilisation.

The controversy was triggered by Ratan Tata, chairman, Tata Enterprises, alleging in a media interview that GSM players had been hoarding excess spectrum, and calling for a probe into the out-of-turn allocation of spectrum to these players. Anil Ambani-led RCOM supported Tata’s allegation.

The GSM operators responded in kind. Vodafone Essar went first with its CEO and managing director, Marten Pieters, stating that the allegations were baseless as the spectrum beyond the first lot of 4.4 MHz was allocated based on the operator’s number of subscribers. Vodafone further argued that a similar subscriber-linked approach had been followed for the allocation of CDMA spectrum too. Bharti Airtel and Idea Cellular soon came out in support of Vodafone’s statement.

Such potshots are certainly not the first between the GSM and CDMA camps. Four years ago, Tata had written to Prime Minister Manmohan Singh and the then communications minister Dayanidhi Maran, stating that the spectrum allocation norms were discriminatory against CDMA operators and the Tatas in particular. He said the subscriber-based norm was not the appropriate methodology for allocating spectrum.

This issue has been recently flagged again with RCOM and TTSL claiming that GSM operators were hoarding airwaves beyond the contracted limit of 6.2 MHz free, thereby resulting in huge losses for the government.

The issue may have died down after the first round of allegations; however, the release of the visitor location register (VLR) report by TRAI has given a new dimension to it. The TRAI data, which captures the number of active subscribers of an operator, reveals that 50-60 per cent of TTSL’s and RCOM’s subscribers were active, in contrast to the national average of 70 per cent. Meanwhile, Bharti Airtel and Idea Cellular had over 89 per cent and 88 per cent active subscribers respectively.

This was ammunition for the GSM operators who lost no time in accusing RCOM and TTSL of inflating their subscriber figures. Idea Cellular and Bharti Airtel issued a joint statement saying, “We have maintained high reporting standards to serve genuine information needs, rather than spurious propaganda needs.” The statement further read: “The report exposes the double standards of these operators. They are the ones who have inflated their own numbers as evidenced in the report of their VLR records establishing a very low active customer base.”

TTSL retorted: “The statement issued by some of the older operators on VLR figures contains inaccuracies and doesn’t hold water.”

The exchange of words continues and has, in fact, been taken to another level. Posting “open letters” seems to have become the norm with Rajeev Chandrashekhar, telecom entrepreneur and Rajya Sabha member, and the Tata scion engaging in a battle that blurs the lines between business and politics.

The next step

While over time the dust will settle on the 2G licence debacle and its fallout, it will no doubt have a long-term effect on the telecom industry. Analysts believe that for foreign investors, the turmoil in the telecom industry is quite unsettling. Even though they may still want to invest in India’s lucrative telecom market, they are likely to wait and watch how the regulatory environment shapes up.

The government’s initiative in issuing show-cause notices to telecom companies for not meeting their rollout obligations or for breaching their licence conditions is being seen as a positive outcome. According to market watchers, “Policy decisions taken quickly and in a transparent manner will go a long way in reassuring the international investor community of the stability of the sector and in reinforcing its investment potential.”

At the recent India Telecom 2010 event organised by FICCI and DoT, Sibal, in an effort to allay the uncertainty in the sector, remarked, “There should be a constant reflection on policies. Technology and economic development has moved so rapidly that the policy framework has not been able to catch up easily. It is, therefore, important for the government to step in and move in sync with the market. Policy decisions should be drafted in complete consultation with all stakeholders to ensure greater transparency and a level playing field for all operators”

As far as the industry goes, operators don’t believe that the spectrum allocation controversy will impact the growth of the industry per se. “The Indian telecom industry will continue to flourish. Everything else is immaterial,” says Sunil Mittal, Bharti Group chairman.

Net, net, analysts say that operators may feel the pinch in the short term. They may have to fork out additional money, given that their margins are under severe pressure due to low tariffs, and 3G spectrum fee and rollouts. In the long term, however, the industry will see greater consolidation with the government playing a proactive role in mitigating the impact of the scam. As Uppal puts it, “I personally think it is good for the sector in the long run. There will be a much higher level of transparency, which one would expect as a logical conclusion.”

 
 

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