2G scam, how the nation’s wealth was looted: Aditi Roy Ghatak and Paranjoy Guha Thakurta

1.6.12

2G scam, how the nation’s wealth was looted: Aditi Roy Ghatak and Paranjoy Guha Thakurta

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2G scam, how the loot of nation’s wealth evolved: Aditi Roy Ghatak and Paranjoy Guha Thakurta (All four parts)

Part 1: A 2G scam that predates Raja: Did telcos steal spectrum?
Part 2: 2G scam no one talks about: Telcos got twice the spectrum
Part 3: 2G spectrum: Policy tweaks helped telcos make a killing at our expense
Part 4: 2G spectrum: How the big telcos got away with murder

Part 1: A 2G scam that predates Raja: Did telcos steal spectrum?

May 29, 2012

By Aditi Roy Ghatak and Paranjoy Guha Thakurta

The spectrum scam neither started with A Raja, nor, for that matter, when the BJP-led NDA government was in power, as is often alleged by the Congress. Spectrum has been misallocated and undervalued ever since the government gave up its monopoly over the country™s airwaves in 1994 when Sukh Ram was Communications Minister.

The untold story of the history of India™s spectrum scandal is being revealed here for the first time after four months of investigation into old records and dozens of off-the-record interviews with experts who disclosed how phrases like ˜cumulative maximum™ were deliberately used to interpret complex rules, thereby depriving the exchequer of its dues.Â

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Technology has a curious way of rendering even popular and often wise English expressions redundant. Whoever said that money could not be made ˜out of thin air™ was mistaken. India has just shown that not only can humongous sums be made out of thin air. Indian ingenuity has accomplished what is arguably the world™s largest ever reported financial scam ˜out of thin air™, in this instance, a close to $40 billion scam relating to misallocation and undervaluation of second-generation or 2G electromagnetic spectrum used mainly for mobile telecommunications.

Whereas the 2G scam has hogged the headlines, there is a strongly suspected but uninvestigated case of ˜stolen™ spectrum, for want of a better word, which started in 1994 when the government of India gave up its monopoly over the telecom sector. So effectively have the tracks been covered that not even seasoned telecom experts with no vested interests sense the possibility of a scam while others dismiss it as ridiculous.

Thus, contrary to questioning the need for placing licences of 1994 vintage under judicial scrutiny on grounds that they have no relevance to the Supreme Court™s February 2012 judgment cancelling 122 licences, the investigation conducted by the two journalists who have written this series of articles suggests that it would be an excellent idea to have the entire licence-spectrum regime of the last 18 years examined thoroughly so that those who have secured spectrum beyond their contractual obligations and possibly through malfeasance be brought to book.

Nearly double that spectrum being given away, way back in 1994-95 under Minister Sukh Ram.PTIOne school of thought suggests that the companies that received extra spectrum only be asked to pay the appropriate price for a finite (and, therefore, scarce) natural resource that has turned them into multi-billionaires in a decade or so. Another view is that the letter and the spirit of the law demands that purloined resources be returned and letting those who misappropriated these resources get away by paying for what was not theirs to begin with, would be tantamount to standing the law on its head.

Spectrum, as every Indian knows, is an invaluable asset in today™s age of communications-driven growth. After the hullabaloo over the 2 February 2012 judgment of Supreme Court Justices GS Singhvi and AK Ganguly (now retired) settles down, the question that should exercise the mind of the interested Indian is how all this began in the first place and how come no one is talking about the roots of the phenomenon called ˜stolen™ spectrum.

Not that everyone is entirely ignorant; the government knows; members of the Joint Parliamentary Committee, set up to examine matters relating to ˜Allocation and Pricing of Telecom Licences and Spectrum™ during 1998, actually had a presentation made to them by the Department of Telecommunications (DoT) clearly suggesting the anomalies in the spectrum allocation, even though the presentation did not underscore this point of stolen spectrum and none of the MPs present asked pointed questions to the officials of the DoT.

To set the stage for this series, it may be worthwhile to revisit recent developments in the telecom space. The Indian telecommunications network currently has in excess of 900 million wireless connections and India has the world™s second largest telecom subscriber base – which is also the fastest growing market with between five million and 10 million additions to the SIM (or ˜subscriber identity module™) card base every month over the last year.

The private sector is at the commanding heights of this market with an 85 percent control, thanks to policies that have provided easy market access for telecom equipment and a regulatory framework that the government promised would be fair for the service providers and affordable for a wide cross-section of Indians. Yet, the government™s actions have been far from fair, irrespective of the party in power. The only Union Minister for Communications to have got seriously implicated in recent times is Andimuthu Raja, who has spent 15 months behind bars.

The important development in recent times is the sudden scramble to seek clarity on pricing of spectrum and allocation, especially after the Telecom Regulatory Authority of India (Trai) released a consultation paper on œAuction of Spectrum” on 7 March 2012.

A quick look at the questionnaire leaves an impression that Trai is inclined to accommodate the incumbent dominant operators at any cost by seemingly trying to develop some consensus on contentious issues through comments from industry associations and other stakeholders, overlooking well established-principles of  œno loss to the exchequer” and raising eyebrows yet again on its ability to be an impartial regulator.

The Trai paper principally deals with the quantum of spectrum to be auctioned, liberalisation of spectrum (ie use of spectrum for any kind of service), refarming (or reallocation) of spectrum in the 800 Mhz (megahertz) and 900 Mhz bands, the structure of the auction, the spectrum block size, the eligibility criteria for participating in the auction, the reserve price, roll-out obligations, spectrum usage charges and spectrum trading.

The bigwigs of the telecom industry are worried that the government would go through with its proposal to charge a one-time fee for 2G spectrum given in excess of 4.4 Mhz. Therein lies the core of the unfolding scam that has been kept under wraps for nearly 18 years. What is the loss to the government? Who knows? All that one knows is that this is not a notional or a ˜presumptive™ loss (to use the terminology of the Comptroller and Auditor General of India). It is a phenomenon that has not been investigated but certainly deserves to be probed by an independent agency.

It is worthwhile visiting the National Telecom Policy (NTP) 1994 approved on 13 May that year, which ushered in the first phase of liberalisation. The NTP 1994, inviting private participation in the telecom space, was designed to achieve international standards in value-added services that had been opened up for private investment in July 1992 for the following: electronic mail; voice mail; data services; audio text services; video text services; video conferencing; radio paging; and cellular mobile telephony. For the first six of these services, companies registered in India were permitted to operate under licences issued on a non-exclusive basis.

The country was divided into 20 telecommunications circles for basic telephone services and 18 for mobile cellular services (excluding the four metropolitan areas, which had been opened up earlier in 1992) that were categorised on the basis of their revenue potential: A (high); B (moderate); C (low). A duopolistic structure was to be introduced with only one private company operating in competition with the government-owned DoT to provide basic telephone services.

Even before the bids were opened for the 21 telecom circles, the then Union Minister heading DoT, Sukh Ram, had said that he was expecting Rs 100,000 crore from them. Indeed, large numbers were being bandied about and The Economic Times reported (28 June 1995; Centre likely to reap bonanza from telecom) that ˜A™ category circles would receive bids of between $2 billion and $3 billion. Clearly the parties were expected to bid aggressively.

Interestingly, HFCL (Himachal Futuristic Corporation Limited), some of whose promoters based in Himachal Pradesh are widely believed to be close to Sukh Ram, put in a bid quoting about Rs 85,000 crore as licence fee, which could have serious financial implications for it as an investor. The escape route provided by Sukh Ram to the company was that the DoT restricted the number of licences that could be obtained by each bidder and also staggered the payment of the licence fee. But that™s another story.

Mobile telephone service started with the issue of eight licences for cellular mobile telephone services (CMTS) in the four metro cities of Delhi, Mumbai, Kolkata and Chennai to eight private companies in November 1994. Subsequently, 34 licences for 18 territorial telecom circles were also issued to 14 private companies between 1995 and 1998.

Under the NTP 1994, bids were invited for private investment in 1995 through a competitive process to introduce an additional basic service operator in each service area. The government decided that only one new entrant would be granted a licence in each service area for providing basic telephone service in competition with the DoT. Three rounds of tenders invited since January 1995 led to the signing of licences for six circles in 1997-98.

Since only a limited number of companies could be allowed to operate in the areas of radio paging and cellular mobile telephone service, the government wanted to grant licences on the basis of tendering with a set of pre-determined criteria for selection: company track record; technological compatibility; future usefulness of the technology being offered; protection of national security interests; ability to give the best quality of service to the consumer at the most competitive cost; and, of course, commercial terms for the DoT, in what is termed as a ˜beauty parade™ method for selecting bidders in industry lingo.

With basic services, the private entrants would be welcome to expand the telecommunication network provided they balanced their coverage between urban and rural areas. Basic operators were allowed to use wireless in local loop (WLL), a then new wireless technology, to offer last mile connectivity. Other conditions of operation included an agreed tariff and revenue-sharing arrangements, amongst other terms as applicable for other value-added services. Amidst such processes and controls started the spectrum giveaways.

That is the curious story that saw a certain amount of spectrum being officially sold or allotted but nearly double that spectrum being given away, way back in 1994-95 under Minister Sukh Ram. This is important because the same game goes on even today as the unfolding story will establish. Sukh Ram was minister in charge of DoT between 18 January 1993 and 16 May 1996. The 1994 files have apparently gone missing, it is alleged by knowledgeable sources. In any case, no one is actually looking for the documents. What was allotted to companies was a ˜cumulative maximum™ of 4.4 Mhz and 4.5 Mhz for state and the metro circles respectively; what was actually given was double the amount!

Bureaucratese in India follows its own lexicon. The phrase ˜cumulative maximum™ was obviously very carefully crafted by a pucca bureaucrat. Clearly, he meant to ensure that there was no way that maximum could be breached. Yet it was. The Mad Hatter™s Telecom Party had begun.

Here™s what a leading industry executive had to say. œBharti Airtel does not hold airwaves beyond the contracted limit¦Every bit of spectrum that we have is as per government policy… so there™s nothing like excess spectrum that we hold”, Deputy Group Chief Executive Officer and Managing Director of Bharti Enterprises Akhil Gupta was quoted as stating (Economic Times, 14 March 2012).

Not all telecom sector experts are in agreement with this view. Admittedly, terms such as ˜paired™ spectrum are commonplace today and one knows that spectrum is always paired for uplinking and downlinking. Therefore, it is being suggested by some that even the term ˜cumulative maximum™ referred to double the amount (for up- and down-links).

Others suggest that in the early days of the telecom sector opening up, when concepts such as paired spectrum were not commonplace, the bureaucrat drafting the policy used an unambiguous English phrase to emphasise that the amount of spectrum allotted was the maximum permissible. In other words, a cumulative maximum of 4.4 Mhz meant a 2.2 Mhz up-link and 2.2 Mhz down-link. What demands investigation is what the government actually meant by the phrase ˜cumulative maximum™ for if these two words are to be taken literally, it implies that there has been a massive breach of the letter as well as the spirit of the law.
http://www.firstpost.com/business/a-2g-scam-that-predates-raja-did-telcos-steal-spectrum-324342.html

Part 2: 2G scam no one talks about: Telcos got twice the spectrum
May 30, 2012

In the first part of our story on the mispricing and misallocation of spectrum since 1994 (read here), we showed how telecom operators were officially given a certain amount of spectrum, but in reality got twice that amount. What was allotted to companies was a ˜cumulative maximum™ of 4.4 Mhz and 4.5 Mhz for state and the metro circles respectively; what was actually given was double the amount since they were given paired spectrum ” 4.4 Mhz for the uplink and a similar amount for the downlink. In this part, we take the story further.

* *Â * * * * * * * * *

It would be useful to understand what radio frequency spectrum means and how this valuable asset was given away without any eyebrows being raised. Spectrum refers to the range of electromagnetic radiation that serves as a carrier wireless transmission and without which there can be no mobile telephony or any other form of wireless transmission. It is worth much more than gold today; it is finite; its availability is controlled by the government of each country on the planet; and the assignment of bands (based on technology and geography) is defined by the United Nations body, the International Telecommunication Union (ITU) in consultation with its members consisting of representatives from governments.

Spectrum is much more than gold today; it is finite; its availability is controlled by the government of each country on the planet. Reuters

India is allotted radio frequency between 9 Khz and 400 Khz. Spectrum is not something that can be wasted nor given away for free.

To understand the phrase ˜cumulative maximum™ ” by manipulating which, a gigantic fraud may well have been perpetrated ” GSM (Global System for Mobile Communications, originally Groupe Spi©cial Mobile) mobile technology involves the use of two-way spectrum; half for downlink (tower to handset) and half for uplink (handset to tower). The first set of licences issued in the mid-1990s provided for a cumulative spectrum of 2.25 Mhz (uplink)+ 2.25 Mhz (downlink) in the bands 890-902.5 and 935-947.5 (GSM 900 Mhz band), or a total of 4.5 Mhz (the œcumulative maximum”), see See document 1 here.

This was specified under Clause 20 of the 1994 licence (Document 1) agreement for the metros. One year later, under Clause 20 of the 1995 licensee agreement (20.3) the cumulative maximum was specified as 4.4 Mhz under bands 890-902.5 and 935-947.5 MHz. The term ˜cumulative maximum™ does not leave itself open to different interpretations. It means the maximum that can be permitted, taking everything into consideration. Yet what was eventually offered was between 8.4 Mhz and 8.8 Mhz to the winning bidders.

The fact remains that those who signed the licence agreement, signed for a cumulative maximum of 4.4 Mhz. However, there was a subsequent clarificatory question in the œTender Documents for Provision of Telephone Service No. 314-7/94-PHC” under the head: œReplies to queries received in terms of Clause 4 of section II, Part I” (not clause 20 under which the cumulative maximum was specified). The replies dealt with the calculation of licence fee using the words œfor a cumulative total of 4.4 Mhz + 4.4 Mhz assigned to an operator for GSM standard mobile cellular system¦” The calculations are as shown in Document 2 below.

Document 2

How or when was the language changed? This is what needs to be investigated. Industry sources say that the terms contained in the licence agreement are what matter, and if the agreement was for a cumulative maximum of 4.4 Mhz, that is what should have been given. Remember, those were the days when spectrum came with a licence. That the terms were changed after the agreement was signed is clear and there were other violations, too, as we will show subsequently.

For starters, the significance of the term ˜cumulative maximum™ is what has to be established and, if there was a breach, it would need to dealt with. On the face of it, it would seem that someone was trying to obfuscate issues because today the phrase ˜cumulative maximum™ has been substituted by the 4.4 Mhz (paired) spectrum in an apparent bid to pass off the malfeasance under a changed technical phraseology.

Very senior bureaucrats who spoke to these writers on condition of anonymity insist that the preoccupation with the term ˜cumulative maximum™ phraseology is unnecessary and that spectrum is always paired. The point being made here is that ˜cumulative maximum™ meant pair and not double the amount as was written in the licence agreement.

The licence agreement (See document 3 here) issued by the Ministry of Communications, Department of Telecom (WPC, or Wireless Planning & Coordination Wing) dated 26 June 1996, to Reliance Telecom Pvt Ltd, assigning to it frequencies for GSM cellular mobile services in (i) Himachal Pradesh, (ii) Madhya Pradesh, (iii) Orissa, (iv) Bihar, (v) West Bengal, and (vi) Assam, in 800/900 Mhz bands said that œassignment in the following bands can be considered: GSM 800/900 Mhz band: 898.2-902.4 MHz for MP, Himachal Pradesh”.

To simplify it for the layman: for Madhya Pradesh, Himachal Pradesh, Orissa, Bihar, West Bengal and the North East, the government was considering allocation in the GSM 800/900 Mhz band, 898.2-902.4 Mhz uplink (902.4 minus 898.2 MHz = 4.2) and 943.2-947.4 Mhz downlink (947.4 minus 943.2 = 4.2), which meant a cumulative of 8.4 Mhz and not a ˜cumulative maximum™ of 4.4 Mhz as was stipulated in the policy.

In the case of Assam, it was 897.0-899.8 uplink (899.8 minus 897.0 = 2.8); 942.0-944.8 Mhz (downlink) = 2.8; and again 901.2-902.4 uplink (901.2 minus 902.4 = 1.2 and 946.2-947.4 Mhz downlink (947.4 minus 946.2 =1.2). Thus a total of 2.8 + 1.2 or 4

Mhz paired or 8 Mhz was given in place of 4.4 Mhz. The concept of a œcumulative maximum™ of 4.4 mega hertz was given a go by.

From when was 8.4 Mhz or more being given away? One has not been able to locate the file (if it does indeed exist).

In a recent deposition before the JPC, former Telecom Secretary Shyamal Ghosh said that it was a practice to allocate additional spectrum since 1996. He told the JPC that since 1996, the DoT had decided that additional spectrum up to 6.2 Mhz could be given œbased on justification” – whatever that means. No one quite knows when the first 8.4 Mhz was given, though those in the know of things suspect that it had been given away right from Day One.

Much later, in 2003, when UAS (unified access service) licences were issued, another distinction was slipped in. Initially, a cumulative maximum of up to 4.4 Mhz + 4.4 Mhz shall be allocated in the case of TDMA (time division multiple access)-based systems (@200 Khz per carrier), or a maximum of 2.5 Mhz + 2.5 Mhz shall be allocated in the case of CDMA (code division multiple access)-based systems (@1.25 Mhz per carrier), on a case-by-case basis, subject to availability.

The Justice Shivraj V. Patil report, prepared by a former judge of the Supreme Court, who comprised the one-man committee of enquiry into the appropriateness of procedures followed by DoT in the issuance of licences and allocation of spectrum during the period 2001-2009, confirms under paragraph 2.84 that œeach cellular operator was allotted start-up spectrum of up to 4.4 Mz + 4.4 Mhz at the initial stage depending on the requirements at various places. Conditions of the licence agreement between DoT and service providers stipulated a cumulative maximum of 4.4 Mhz + 4.4 Mhz in the 900 Mhz band”.

Given its terms of reference, Justice Patil™s one-man committee was not required to go into what had transpired prior to 2001.

Who were the recipients of this initial largesse? On 31 July 1995, amidst great jubilation, the then West Bengal Chief Minister Jyoti Basu made India™s first cellular phone call to the then Union Telecom Minister Sukh Ram, inaugurating Modi Telstra™s MobileNet service in Kolkata. The company was a joint venture between the Modi Group and Australian telecom giant Telstra, and was one of the eight licensees to provide cellular services.

There were problems galore with the Indian Army still not comfortable with giving up spectrum, hitherto reserved for its own wireless communications. All this was overshadowed by the excitement of India going cellular. The other Kolkata service provider was Usha Martin Telekom that launched its Command service soon after (see Table 1 below).

Table 1

In Delhi, Bharti Cellular launched Airtel while the other winner

of a cellular licence was Sterling Cellular. BPL Mobile and Max Hutchison were the winners for Mumbai while RPG Cellular and Skycell Mobile Telecom were awarded licences for Chennai. Not too long thereafter, both the Kolkata licensees changed hands: the new providers were Bharti and Hutchison (now Vodafone). How much did the operators pay? As little as Rs 1 crore was paid for the Chennai licences. But there was much more waiting for the service providers as the years went by (See Table 2 below).

Table 2

How was the licence fee calculated? (See document 4 here) Paragraph 20.4 in the agreement explained that licence fee and royalty shall have to be paid for grant of licence, which will be subject to revision from time to time. (Note: A sample calculation of the rates of royalty and licence fee for the time being in force is as follows – Royalty: Rs 4,800 x 8 x 22 = Rs 8,44,800 per annum, where 22 is the number of RF (radio frequency) channels of 200 Khz each and 8 is the number of voice equivalent channels per RF carrier; Licence fee: Rs 100 per base station per annum in each cell is liable to be reviewed).

There are two more important sidebars to this whole issue. The big benefit that the early arrivals got was securing spectrum in the 900 Mhz band that is far more efficient, both technically and economically. This was assigned mostly to the first three cellular licensees in most of the service areas. The subsequent licensees were given spectrum in the 1,800 Mhz band only.

To go back to the DoT, it had actually recorded this strange story around breaking the ˜cumulative maximum™ barrier that led to the gifting of more than 35 Mhz of spectrum around 1994-95 (4.4 Mhz extra for each operator in each circle, or 8.8 Mhz per circle multiplied by four circles). The complexities of calculating the value make it quite a formidable exercise because the real value of spectrum (like land) lies in its prospective value, the dexterity with which it had been leveraged to deepen the capital base of its owners that would have been impossible without this extra-constitutional asset.

Some of the original victors have done extremely well for themselves. Airtel, for instance, is the world™s third largest telecom operator with more than 243.336Â million customers across 20 countries as of March 2012.

The chicanery was convincingly concluded in a note prepared by DoT in November/December 2011, when everything that it did was coming under public scrutiny. The subject was: levy of one-time spectrum acquisition charge for allotment of additional spectrum to 2G service providers. The sub-heading said: œGrant of access services (CMTS, Basic and UAS) licences. Under clause 1.1 it said: œIn November 1994, two Cellular Mobile Telephone Services (CMTS) licences were awarded in the four metro cities of Delhi, Mumbai, Kolkata and Chennai based on ˜beauty parade™. Total eight (two each in the four metros) CMTS licences in metros were awarded, licence fees payable over 10 years™ licence period was predetermined by DoT. 4.5 + 4.5 MHz GSM spectrum was assured in 900 Mhz and no upfront charges was (were) to be paid for spectrum. Spectrum usages charges were payable separately at applicable rates”.

Quietly, the DoT had given the concept of cumulative maximum a burial. There was worse to follow. The note further stated that the legal tenability and sustainability of asking for a one-time fee for the spectrum already issued is being questioned.

There is a prima facie case for a thorough investigation. Those who oppose a probe say that there could have been no question of a ˜cumulative maximum™ of 4.4 Mhz because no operator could have rolled out a service on such a meagre allocation of spectrum. Others point out that in those early days, no one imagined such a massive rollout of cellular phone services would take place.

Common sense suggests that if one has taken more than the permitted ˜cumulative maximum™, one has broken the law. The licence agreement in 1995 clearly mentions a ˜cumulative maximum™ of 4.4 Mhz. Clearly, the DoT does not read its own documents. It was only in 2001 that the doubling of the allotted spectrum was regularised in the amended licence agreement. Once again, an investigation is necessitated to find out what exactly happened.

If one breaks the law, one is supposed to be punished. Here in India, even an impartial investigation is proving rather difficult in this Mad Hatter™s Telecom party.

http://www.firstpost.com/business/the-2g-scam-no-one-talks-about-telcos-got-twice-the-spectrum-325596.html

Part 3: 2G spectrum: Policy tweaks helped telcos make a killing at our expense
May 31, 2012

In the first and second parts of our story on the mispricing and misallocation of spectrum since 1994 (read here and here), we showed how telecom operators were officially given a certain amount of spectrum, but in reality got twice that amount. But this unintended benefit was given not just by one regime, but several of them ranging from the Congress government of the 1990s to the NDA at the turn of the century.

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On 30 January 2011, a group of academics submitted a commissioned report to the Telecom Regulatory Authority of India (Trai) on œThe 2010 value of spectrum in 1,800 Mhz band”. It was clear that the entire pricing of spectrum had become so convoluted (in all probability, deliberately) that there was need to get a fair fix on prices with retrospective effect, though the exercise was not described as such.

There was much confusion about what would be a fair price for spectrum and whether third generation, or 3G, auction prices of 2010 could be treated as a fair price for 2G. The experts were hard at work estimating the cost of spectrum that had already been sold by the government. Had it not been a matter of such gravity, this might have occasioned some hilarity.

For the record, the government issued licenses for cellular mobile services for Delhi, Mumbai, Kolkata and Chennai under a duopoly (not more than two cellular mobile operators for each circle)

Nevertheless, in the world of the Mad Hatter™s Telecom Party, a DoT chart (prepared by these experts around May 2011), said that the 2001 entry fee per Mhz of spectrum was Rs 27.53 crore in Delhi ” dividing the entry fee of each LSA (licensed service area) by 6.2 Mhz. In 2010, it was Rs 149.78 crore per Mhz up to 6.2 Mhz and Rs 249.73 crore beyond 6.2 Mhz. Most of these experts have been consultants to the powerful DoT though it is not suggested that they were less than totally above board.

The group was not asked to travel back beyond 2001 and did not visit 1994-95, when the spectrum scam started. As one has already noted, even the Justice Shivraj Patil Committee, which produced a monumental report on the developments in the Indian telecom space, did not go into the spectrum scam that took place before 2001. Industry sources question the methodology followed by these experts, who have themselves asked for more time to review their report.

What has not been investigated is if the earliest beneficiaries of the spectrum allotments received a bounty in excess of 35 Mhz. It would be a good idea to get these experts to extrapolate what the generosity of the government cost the exchequer (using 2001 figures) in 1995. In any event, Trai itself says that the valuation makes several significant assumptions and eventually the figures estimated by the experts œmay not always match the exact market price”. More importantly, it is suggested that these are undervaluations, which will become a sensitive issue if (at all) and when the operators are charged for any excess spectrum they hold.

Industry sources say that one way of deriving an estimation of the value of the extra spectrum would be to add to the price of the additional spectrum a percentage of the value at which the beneficiary companies sold their equity. Indeed, the current crop of ˜guilty diluters of equity™ is not the first one. Amongst the first ones were Bharti and Hutchison! Indeed, C Sivasankaran of Sterling Cellular sold out to the Essar group in 1994 for a reported $150 million, according to George Hiscock, writing in India™s Global Wealth Club. Essar later sold its interests to Vodafone.

Meanwhile, Sivasankaran bought the RPG group™s Chennai mobile phone services in 2003 for about $60 million that he later sold to Malaysia™s Maxis group for a little over $1 billion. These numbers are indicative of the sums for which telecom companies in India that had access to spectrum could change hands even in those early days.

The critical question is whether and how the recipients of the government™s largesse leveraged the value of the excess spectrum to build (for some) their not-too-substantial capital bases in those times. It occasions little surprise that the suspected spectrum giveaway has been brushed under the carpet. Exposing it to public scrutiny would mean being forced to learn from the first scam so that the exchequer could be protected from being looted any further. Today the loot continues.

As one finds the octogenarian Sukh Ram, in whose regime all this started, shifting residences between prison and hospital, it would be of interest to know what was the actual nature of the scam that he had unleashed, which is entirely different from the one for which he lost his portfolio and found himself in handcuffs. The estimated loss to the exchequer for the detected scam was about Rs 1.7 crore, which is small change compared to the ongoing loot. (See Chart A and Chart B on India™s telecom ministers and secretaries)

The most important reason to revisit the origin of the telecom scam is that the spectrum giveaways ” for which Sukh Ram was never charged ” never got detected or discussed. The minister and his bureaucrat, then Deputy Director General (Telecom) Runu Ghosh, have since been sentenced to imprisonment in another case featuring the award of a contract to the Hyderabad-based Advanced Radio Masts (ARM) for telecom equipment. The charge was that the company, whose Managing Director P Rama Rao is also serving a three-year jail term, charged the DoT a higher rate, causing the exchequer a loss of around Rs 1.7 crore. For the bigger scam, the former Union minister has not even been investigated.

The long arm of the law took a rather long time to mete out justice to the perpetrators of the fraud. The ARM scam occurred in 1993, the trial court ordered a three-year jail term for the minister and the managing director in 2002; the order was upheld by the Delhi High Court on 21 December 2011 and confirmed by the Supreme Court on 5 January 2012.

Meanwhile, the spectrum giveaway has been given a quiet burial; the actual loss to the exchequer is yet unassessed. More worrying is that the theft continued through the next phase of the liberalisation of India™s telecom sector.

Under the New Telecom Policy (NTP) 1994, DoT had also cleared the technical portion of the 158 bids that it had received from 32 companies for nationwide cellular services. These covered 20 state circles that had not yet been opened up for licenses. There were no bids for the troubled North-East or for Jammu & Kashmir and the Andaman & Nicobar Islands. The government, thereafter, issued 34 licences for 18 service areas (two licences were issued for Cellular Mobile Telephone Services, or CMTS, in 16 areas and one each in two areas) to 14 private players between 1995 and 1998.

The companies, referred to as the first and second cellular licensees had to pay a fixed annual licence fees that were mutually agreed upon during the bidding process. The bids were for a 10-year licence period and no upfront spectrum charges were levied. Later, they were allowed to migrate to the New Telecom Policy 1999 (NTP 99) regime, which featured a licence fee based on shared revenue from 1 August 1999. Amidst all these convoluted rules and regulations, mischief was afoot.

The CMTS operators had two cellular licences given for each of the four metropolitan cities of Delhi, Mumbai, Kolkata and Chennai, based on prescribed criteria with licence agreements signed in November 1994. There was a fixed licence fee prescribed by the DoT that wanted spectrum usage charges to be paid at applicable rates. The DoT placed a ceiling on tariff and call charges and operators in the metros were authorised to provide mobile telephone service conforming to GSM technology. A ˜cumulative maximum™ spectrum of up to 4.5 Mhz in the bands 890-902.5 and 935-947.5 (GSM 900 MHz band) was permitted.

This, as one has seen (read here), meant nothing and the winning bidders got double of what was mentioned in the licence agreement with more windfall gains to follow (See Table 3 below)

Table 3

There was much angst amongst the losing bidders and a massive legal battle ensued. Tata Cellular, which was originally selected for Delhi, had been left out and preferred a special leave petition (SLP [Civil] [Nos. 14191-94 of 1993]), the judgment revealing how murky and vitiated the process actually was. All was, however, forgotten in the excitement of India going mobile and as the country was getting used to the idea of the cellphone, someone was getting used to the idea of stealing spectrum.

For the record, the government issued licenses for cellular mobile services for Delhi, Mumbai, Kolkata and Chennai under a duopoly (not more than two cellular mobile operators for each circle). The duopoly scheme had a fixed licence fee regime for 10 years. The total amount payable by Bharti and Sterling for the Delhi circle, for instance, would be Rs 28 crore for the first three years, after which the licence fee would be payable at the rate of Rs 5,000 per subscriber per year. There was also a permitted rental charge of Rs 156 per subscriber per month on the basis of which the licencees were selected.

This is important because the amount that the operator could charge the subscriber was restricted to Rs 156 plus a Rs 16 per one-minute call; an arrangement that was drastically changed later. Interestingly, BPL and Hutchison Max paid much more for the Mumbai circle; Rs 42 crore for the first three years. Modi Telstra and Usha Martin paid a modest Rs 21 crore for the Kolkata circle while RPG Cellular and Skycell paid an even lower Rs 14 crore for the Chennai circle.

Having breached the ˜cumulative maximum™ barrier, the government proceeded with more giveaways in 1995 with bids for circles (states) for a period of 10 years, again with a cumulative maximum of 4.4 Mhz of spectrum per bidder being given. The next phase followed in 2001 with licences bundled with spectrum being given for the fourth operator (the third operator being the government) where the terms were changed: now the maximum spectrum that could be allotted would be 4.4 Mhz plus 4.4 Mhz subject to a maximum of 6.2 Mhz plus 6.2 Mhz. In the fourth round of bidding, the government brought in the wireless in local loop (WLL) operators on the same platform as the licences issued in the third round (in 2001), by when the National Democratic Alliance (NDA) headed by Atal Behari Vajpayee was in power.

How was the issuance of the first round of licences vitiated? The licensees were to pay Rs 5,000 per subscriber per year from the fourth year (that worked out to Rs 417 per month x 12). Here is when chicanery took place: The Telecom Regulatory Authority of India, which had been set up in 1997, agreed to a curious proposal. The initial permitted charge of Rs 156 per subscriber per month, on the basis of which the licencees were selected, was suddenly enhanced to Rs 600 per month.

This meant that the subscriber would pay more than three times the original charge while the per call charge of Rs 16 per minute was brought down to Rs 6, making nonsense of the arithmetic on the basis of which the licences were secured and giving the operators a windfall gain. No questions were asked. How did the operators secure this bonanza?

Table 4
( SeeTable 4 above)Â shows how by raising the subscriber fee to Rs 600, the government made it possible for the operators to pass on the entire extra payment burden on to the subscriber. Ordinary subscribers, or users of mobile phones, paid the money and the operators just raked it in. Indeed, they would make Rs 100 per subscriber and even if the per call charge was zero, they would make money.

Janta maree gayee (˜ordinary people have been massacred™) was the popular refrain among bigwigs of telecom companies who watched gleefully from the sidelines. The janta had no voice (save that he could have expensive conversations), the operators made merry; their bottomlines had come alive with a positive Rs 183 per subscriber per month from a negative one (-) Rs 260.

One may well point out that it was the government that permitted such changes but that does not make the changes honourable. One may also say that the operators could not pull off such high rates and could hold them for limited slabs and for a very short period of time.

The point is that such ridiculous rates were cleared by the government. At whose behest? Good question!

http://www.firstpost.com/business/2g-spectrum-policy-tweaks-helped-telcos-make-a-killing-at-our-expense-326859.html

Part 4: 2G spectrum: How the big telcos got away with murder
Jun 1, 2012

By Aditi Roy Ghatak and Paranjoy Guha Thakurta

In the first three parts of our story on the mispricing and misallocation of spectrum since 1994 (read here and here and here), we showed how telecom operators were officially given a certain amount of spectrum, but in reality got twice that amount. But unintended benefits were given not just by one regime, but several of them ranging from the Congress government of the 1990s to the NDA at the turn of the century. Moreover, the policies were changed wholesale to extend licence periods from 10 to 20 years and the basis of fee collection shifted from fixed amounts to revenue share. The big boys got away with murder.

*************
Former Telecom Minister Sukh Ram was still king when the time came to open up state telecom circles (or geographical areas) to private bidders. When the results of the bidding were out, it was clear that the higher bids went for the lucrative markets while circles like Jammu & Kashmir received no bids for either basic or cellular services and the Andaman & Nicobar Island circle received no bids for cellular services. In basic fixed line services, the Reliance-Nynex groups had bid for all 20 circles while Himachal Futuristic Communications Ltd (HFCL, an India-Israel-Thailand venture), from Sukh Ram™s home state of Himachal Pradesh, bid very high in nine circles.

The firm (valued at Rs 2,500 crore) was initially awarded these lucrative licenses for nine circles for Rs 85,900 crore (or more than three-fourths of the total bid amount at that time). HFCL™s bids were around five times higher than what companies in the Tata, Ambani and RPG groups as well as other players had to offer.

It was evident, however, that the firm did not have the capacity to pay and the government chose to award licences for only three circles to HFCL and invite fresh bids for the remaining six circles later in January 1996. The focus was on everything but spectrum. To put it in more moderate bureaucratic language: since New Telecom Policy NTP) 1994 had also recognised that the government did not have the resources needed to achieve its telephony targets, it opened the basic telephone services segment to the private sector. It invited bids for private investment in 1995 through a competitive process to introduce an additional basic service operator in each service area.

The government then decided that only one new entrant would be granted a licence in each service area for providing basic telephone service in competition with DoT. Three rounds of tenders invited since January 1995 led to the signing of licences agreements for six circles only in 1997-98. Sukh Ram was gone by May 1996, Prime Minister Atal Behari Vajpayee took over for 13 days and he was followed by HD Deve Gowda as Prime Minister. It was under Beni Prasad Verma that the actual awarding of licences for state circles was concluded.

In all, 32 responses were received for the tender notices for cellular services, of which 13 were from North America and 10 from Europe. There was a political storm over selling out to foreign telecom multinationals and the government introduced four changes in August 1995: these were œ(1) no single company could receive a licence for more than two ˜A™ category circles in cellular services; (2) no single company could receive a licence for more than three ˜A™ and ˜B™ circles in basic services; (3) 10 percent of all new lines had to be installed in rural areas; and three percent of the bidding weight was assigned to the use of indigenous equipment”.

Why was a deal for 10 years extended mid-way to 20 years without any additional price charged by the Group of Ministers? PTIThe fact remained that once the dust settled down, the bidders for the circles realised that they had bid too aggressively and while the metro operators were raking it in, the new bidders were in trouble and started demanding concessions. Many of the international winners sold out and quit the country.

Even as the metro operators were earning handsome profits, the circle operators who had paid much larger sums for the licences were in financial trouble and wanted the government to consider changing to a revenue-sharing model. The truth is that what the government achieved after the end of the exercise ” after the financially troubled winners had quit ” was to establish the raj or the dominance of a few players, who seem to have exercised extraordinary powers over the decision-making process even after Sukh Ram had to quit.

The Indian National Congress lost the May 1996 elections and, after the 13-day Vajpayee government, Deve Gowda became Prime Minister of the short-lived United Front coalition government (1996-1998). The Congress agreed to support another United Front government under IK Gujral from 21 April 1997. Interestingly, Beni Prasad Verma served as the Union Telecom Minister under both Deve Gowda and Gujral.

The Telecom Regulatory Authority of India (Trai) admits to giving away concessions to the initial operators in a report on œSpectrum Management and Licensing Framework” submitted on 11 May 2010. On migration of licences from a fixed licence fee regime to a revenue-sharing regime, the revenue share was provisionally fixed at 15 percent of the adjusted gross revenue (AGR) subject to review by Trai and was reduced to 12 percent for the metros and ˜A™ circles, 10 percent for ˜B™ circles and 8 percent for ˜C™ circles, when the basic service operators, or BSOs, were permitted to provide limited mobility from 25 January 2001.

The licence fee was further reduced to 10 percent, eight percent and six percent respectively of the AGR from 1 April 2004. Even better, the old cellular licensees (first and second CMTS, or cellular mobile telecom services licensees) were given an additional concession of two percent in their licence fees for a period of four years.

This meant the excess spectrum allotted to the big boys – discussed in the first part of our series (read here) ” now came with even lower licence payments.

To go back to Sukh Ram and his redoubtable Deputy Director General, Runu Ghosh, did they not understand the theft that was taking place under their noses or was there complicity? Did the telecom ministers who subsequently occupied the most spacious room in New Delhi™s Sanchar Bhavan and their extremely competent secretaries too not understand the meaning of the simple English term ˜cumulative maximum™?

Whatever the truth, the stealing of spectrum continued unabated through 1995. When it came to accepting bids for the 18 circles in December 1995, spectrum charges were again delineated from wireless operating licence fees and were to be paid for separately. What was specified, however, was that a maximum of 4.4 Mhz of spectrum would be given and the contracts were signed for this quantum of spectrum.

As one has noted, the change in government meant better times for the telecom sector. The one Telecom Minister with a difference was, of course, Jagmohan. For the industry, he struck a jarring note. Jagmohan (who was Telecom Minister between December 1998 and June 1999) tried to clean up DoT ” not very successfully. Operators owed the government around Rs 3,500 crore in licence fees and the minister found no reason to waive the money.

Sure enough, he was evicted, thanks to intense lobbying by telecom companies and their allies among politicians. The cellular telephone industry was reporting losses worth $92 million every month but Jagmohan did not find the reasons proferred by telecom firms convincing and was not prepared to waive their debts. His departure laid the grounds for the taking over of this vital portfolio by Prime Minister Vajpayee himself, that is, till he handed over charge to Ram Vilas Paswan in October 1999.

Indeed the new government had already been greeted with complaints from the telecom sector that it was feeling stifled, prompting the creation of a Group on Telecom (GoT) in 1998 that was to recommend a new telecom policy. The Union Cabinet under Vajpayee, with Anil Kumar as Telecom Secretary (who served between 28 August 1998 and 7 February 2000) considered and approved the New Telecom Policy 1999 (NTP 99), effective from 1 April 1999; All Fool™s Day.

The redoubtable NK Singh was the then Secretary to the Prime Minister, apart from being the Member Secretary of the Task Force on Telecommunications between August 1998 and April 2001.

By an order dated 1 October 1999, cellular licences were made technology-neutral. Vajpayee was still in charge of DoT, Jagmohan having been removed from the position by then. Prior to that, it was mandatory for the licensees to use GSM technology. NTP 99 also allowed licensees to migrate from a fixed licence fee regime to a revenue share arrangement with effect from 1 August 1999. NTP 99 mentioned that licences would be awarded for an initial period of 20 years and would be extendable by additional periods of 10 years thereafter.

The government allowed the public sector Mahanagar Telephone Nigam Ltd (MTNL) to enter as the third mobile operator and granted it a licence in 1997 for the Delhi and Mumbai service areas. The other public sector corporation, Bharat Sanchar Nigam Ltd (BSNL), was licensed as the third cellular mobile operator in the year 2000 for all service areas except Delhi and Mumbai. A fourth cellular mobile service provider was introduced in 2001 through a multi-stage bidding process.

The stated purpose of the new telecom policy was to ensure investments and competition in the sector, affordable and effective communications for the public, encourage development of telecommunication facilities in remote, hilly and tribal areas of the country and to resolve problems facing the existing licensees. The answer lay in migrating the existing licences from fixed licence fees to a revenue sharing regime from July 1999.

Other exciting developments happened in this period as well. Out of the blue, under the guise of helping everyone, the government not only allowed the circle operators to migrate to the revenue-sharing model but also extended the licence period from 10 to 20 years free of cost. Worse, it extended this advantage to the metro operators, who were doing pretty well for themselves. All this was done under the NDA government headed by Prime Minister Vajpayee, who, incidentally, holds a record of sorts having held the telecom portfolio no less than five times.

Under the migration package, the existing licensees gave up their duopoly rights and additional operators were inducted in a regime of multiple players and the government issued cellular licences to MTNL and BSNL in 1999-2000 as the third CMTS operator. Under the guise of compensating the operators for the loss of their duopoly to a competitive regime, two sops of sorts were offered to the original licensees. The advent of public sector operators could hardly make a difference to the private operators: the former were hamstrung in every aspect ” lack of autonomy being the main one. This deprived them of the nimble-footedness to take on sharp competition from the private operators head on.

By scrapping the Rs 5,000 per subscriber clause and enhancing the rental of Rs 156 permitted charge per subscriber to Rs 600 and then doubling the licence period from 10 to 20 years for the CMTS operators and from 15 to 20 years for the BTS licence holders, it can be argued that these actions constituted yet another change of rules after the game was begun.

Since when can the government increase the tenure of a concession without charging an appropriate fee? Again, while there was logic in allowing the circle operators to migrate to a revenue-sharing model, there was none in extending the concession to the metro operators who were raking in huge profits. To supplement it with a free doubling of the licence period was simple manna from heaven for them.

The loss to the government would have run into thousands of crores of rupees. Every time a lease is renewed it is done under new commercial terms. How on earth was this deal done to benefit the metro operators, who had already been given an excellent deal in terms of pricing and free spectrum? Why was a deal for 10 years extended mid-way to 20 years without any additional price charged by the Group of Ministers? This is yet another unanswered question.

The Mad Hatter™s Telecom Party continued. Today, under the scrutiny of the apex court, the incumbent Communications Minister Kapil Sibal is again talking of a 10-year licence period. This is what should have been the case from Day One. What logic or what sums of money persuaded the government to change its mind in 1999 is yet another unanswered question.

The story did not end there. Yet another facility was provided: the date for paying licence fees was extended by six months, again under Vajpayee as Telecom Minister. Like all good ministers, the former Prime Minister was probably keen on increasing the reach of telephony in the country but left the arithmetic of the business to his bureaucrats. The good news was that at least some of the benefits were passed on to the consumer because, after 1999, the use of mobile phones expanded exponentially with tariffs plummeting, resulting in a stupendous rise in the country™s subscriber base of mobile phone users. The only loser was, of course, the government ” willingly so.

http://www.firstpost.com/business/2g-spectrum-how-the-big-telcos-got-away-with-murder-328459.html

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One thought on “2G scam, how the nation’s wealth was looted: Aditi Roy Ghatak and Paranjoy Guha Thakurta

  1. Pingback: 2G scam, how the nation’s wealth was looted: Aditi Roy Ghatak and Paranjoy Guha Thakurta « Janamejayan’s Weblog

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