In a landmark judgment in 2012, the Supreme Court cancelled 122, 2G licences. Our coverage from 2012
On February 2, 2012, the Supreme Court delivered its landmark judgment, revoking the 122 controversial telecom licences awarded in 2008. While the full picture is still emerging, the impact is already being felt.
The Supreme Court’s 94-page ruling on the 2G spectrum case is scathing. It has come down heavily on large corporate firms, which are known to have considerable influence in the corridors of power. Using harsh words, the Supreme Court has called the 2008 grant of 2G licences as “illegal, capricious and contrary to public interest apart from being violate of the doctrine of equality”. It has further gone on to say that the “respondents were benefited by a wholly arbitrary and unconstitutional action taken by the Department of Telecommunications (DoT) in granting licences and allocating spectrum in the 2G band, who later offloaded their stakes for many thousands of crores in the name of fresh infusion of equity or transfer”.
Not sparing the Telecom Regulatory Authority of India (TRAI) either, the judgment notes: “To say the least, the entire approach of the TRAI was lopsided and contrary to the decision taken by the council of ministers. Its recommendations became a handle for (former communications minister A. Raja) and the officers of DoT who virtually gifted away the important national asset at throwaway prices.”
The court’s severity is merited. It underlines the fact that as far as scandals go, the telecom graft controversy beats most mega scams of the recent past. According to the Comptroller and Auditor General (CAG), it cost the exchequer about $36 billion, and resulted in Raja and various politicians and corporate heavyweights being put behind bars.
As per the court ruling now, all cancelled spectrum has to be returned within four months and then auctioned off. Companies intending to continue operations for the next four months will have to pay the market price to do so. During this time, TRAI will look into the matter and make recommendations for fresh auctions. The court has demanded that auctions take place as soon as possible and, to be credible, should be open to all operators.
Meanwhile, the court has imposed a fine of Rs 50 million each on Unitech Wireless, Swan Telecom and Tata Teleservices Limited (TTSL) for being beneficiaries of Raja’s arbitrary policies. Loop, S Tel, Allianz and Sistema Shyam TeleServices Limited (SSTL) have been fined Rs 5 million each; half of this will go towards the court’s legal aid services and the remaining to the defence services.
The fallout
There is no immediate cause for worry for subscribers of the operators whose licences have been cancelled. Both TRAI and Minister for Communications Kapil Sibal maintain that there will be no adverse impact on users as they have four months to change their service providers. Besides, the new operators have less than 4 per cent market share. Uninor, with 3.67 per cent share, leads the pack followed by SSTL with 1.59 per cent share, Videocon with 0.69 per cent and Loop with 0.36 per cent.
The political ramifications of the court order will only play out over time. Raja is likely to serve a longer sentence and his trial may open another can of worms.
Sibal, meanwhile, claims that the court’s judgment is not an indictment of the present government. “The government will move forward on the issue after the regulator makes its recommendations. If there is any indictment, it is of the 2003 policy (first come, first served) of the NDA government, and we only followed it,” he stated at a press conference.
From a business perspective, industry experts believe that the verdict will, in the long run, be positive for the industry. Until now, the fate of all the licences bought at a bargain price was in doubt. The verdict will remove these uncertainties in the telecom sector and bring policy stability. Also, the auctioning of 2G spectrum will help raise more revenues for the government than it did the first time around.
For the moment though, turmoil rages in the mobile industry. The Supreme Court has rescinded a total of 122 licences awarded to eight operators. Eighty five of the 122 licences did not fulfil the eligibility criteria, according to the CAG. The cancelled licences include 9 of Idea Cellular, 3 of Tata Teleservices Limited (TTSL), 13 of Swan Telecom, 21 of Loop Telecom, 21 of Videocon, 6 of S Tel and 15 of Etisalat and 22 of Uninor. The verdict will thus have a huge impact on operations.
According to analysts, in the short run, most telecom players, barring Bharti Airtel, Vodafone and RCOM, will be affected. In fact, operators like Bharti Airtel, Vodafone and RCOM will use this as an opportunity to consolidate their position and increase market share.
For TTSL and Idea Cellular, which have been operational for several years, the court order puts them in a difficult position. According to a statement issued by Idea Cellular, it has been unwittingly caught in the situation of the licence cancellations just because its licences too were granted in January 2008, 18 months after it had originally applied for 2G licences in nine circles. In fact, Idea Cellular had filed a petition with the Telecom Disputes Settlement and Appellate Tribunal inter alia seeking to isolate its application from the 2007-08 applications, and thus requesting for priority under the then DoT policy of first come, first served.
“This seems to have been recognised by the Supreme Court as it has not charged us any penalty. It is unfortunate that a serious incumbent operator like Idea Cellular is being made to suffer due to this cancellation of licences, despite being fully compliant at each stage of the licence allocation process,” stated Idea Cellular in a media release.
For Idea Cellular, which has rolled out services in seven of the nine licensed areas in question, there is a lot at stake. In these seven service areas – Tamil Nadu, Kolkata, West Bengal, Orissa, Assam, the Northeast and Jammu & Kashmir – Idea has over 6 million subscribers, which account for about 5 per cent of its cumulative capex and 4 per cent of its revenue. These are, moreover, EBITDA loss-making circles.
“We understand that the licence holders are allowed to continue operations for the next four months and an auction will be conducted for these licences within this period. We will study in detail the Supreme Court judgment and explore all possibilities to protect our investment,” the company notes.
TTSL too issued a statement, saying it welcomed the Supreme Court’s judgment that spectrum, a scarce national resource, should be allotted through auctions. It has always been of the view that spectrum has value and should be paid for.
However, it points out that at the time when NTT DOCOMO invested in TTSL, the latter had 17 licences, had been in operation for over 12 years, had an annual turnover of Rs 60 billion, 3,000 employees, 33 million subscribers, 60,000 km of fibre, a national long distance business, 38 per cent investments in Tata Teleservices (Maharashtra) Limited and 100 per cent investments in its tower subsidiary. Therefore, “the clubbing of TTSL with two new licensees who had just entered the telecom business is not fair. The judgment appears to have overlooked this and the fact that only three new licences were granted to TTSL in January 2008, that these were for Assam, the Northeast and Jammu & Kashmir and, most of all, these were CDMA licences. The investment made by its strategic partner NTT DOCOMO was, therefore, not on account of these three licences but on account of TTSL’s established position as one of the strong players in the telecom field,” reads the statement. Besides, TTSL had applied for these three licences in June 2006 and had to wait for over 18 months to receive the letter of intent in 2008. Going forward, TTSL proposes to file a review petition in the Supreme Court, seeking redressal on these points.
The worst hit
The most impacted by the Supreme Court judgment are foreign companies like Telenor, Bahrain Telecommunications Company (Batelco), Etisalat and Sistema, which paid heavily to pick up stake in the Indian companies. Batelco became the first casualty of the verdict. It announced its plans to exit India by selling its 43 per cent stake in S Tel back to its Indian affiliate.
“The Supreme Court’s decision took the entire industry by surprise and significantly alters the competitive landscape in India’s telecommunications market,” the company said.
Etisalat, the second largest telecom company in terms of market value in the UAE, entered the Indian market in 2008 after buying a 45 per cent stake in DB Realty-promoted Swan Telecom for $900 million. Following the ruling, which cancels its 15 mobile permits in the country, Etisalat announced that it would be taking a $829 million hit on its Indian earnings.
Norway’s Telenor, which partnered with Unitech Wireless in Uninor, too wrote down $721 million in licences and goodwill in India after all its 22 mobile permits were quashed by the apex court. Both Etisalat and Telenor argue that they had invested in India as per the existing policy and that they entered this market only after the licences had been awarded.
According to Telenor officials, “The companies involved in the 2G allocation followed the rules set by the telecom minister – however arbitrary that process might have seemed. We met every inch of that regulation of that licence. We have brought competition to the Indian market, just to see a ruling that has significant retroactive consequences.”
To ensure that Telenor’s over Rs 140 billion investment in India is not jeopardised, Norway is intensifying its diplomatic efforts in India. Norwegian IT Minister Rigmor Aasrud met Sibal recently to discuss various issues relating to the 2G controversy and the possible way forward.
“We look to the government to arrive at a fair outcome that doesn’t risk our lawful investment. We also need to make sure that there is a framework for continuing our operations in the country,” says Sigve Brekke, managing director, Uninor and Telenor’s Asia head. The company has also said it would wait for the new rules on spectrum auction before taking a call on participating in it.
SSTL, a joint venture between Russia’s Sistema (56.68 per cent stake) and India’s Shyam Group (17.14 per cent stake) which provides services under the MTS brand name, has also said that it reserves the right to protect its interests by using all available judicial remedies and will consider the option of filing a review petition in the apex court. “To safeguard its interests, Sistema and SSTL will contest this order by pursuing all available legal remedies. In the meantime, the Indian operations will remain business as usual for SSTL, a national telecom operator serving more than 15 million customers, employing over 3,500 employees and with investments of over $2.5 billion,” the company release stated.
For these international companies, whichever way matters pan out in the future, what is certain is that they stand to lose money. Their position is tenuous. And they are yet to break even. The cancellation of licences will amount to annulling their investment. Of course, their physical network and infrastructure can be sold and they have the option to re-enter the market once a fresh auction takes place.
Conclusion
Going forward, foreign investments are likely to take a hit. Telecom experts believe that FDI will not come in easily from now on, until investors are convinced that the new policy is stable. Already, ever since the Central Bureau of Investigation started its investigation into the 2G scam and the Supreme Court began looking into the scandal, foreign investors have stayed away.
It is now for the government to clean up the mess and put in place a set of norms that are forward-looking and transparent. Sibal, for one, is confident that the Indian telecom market still holds a lot of promise for serious investors. The industry is hoping he is right but then, only time will tell which way the dice will roll
