Spectrum Swindles
Potential loss to public exchequer: Rs 10,000 crore

Communications and Information Technology Minister A Raja has blatantly tried to bend rules to allocate scarce electromagnetic spectrum to specific mobile phone companies that would result in a Rs 10,000-crore loss to the exchequer. But he may not succeed.

By Ravi Visvesvaraya Prasad & Paranjoy Guha Thakurta

On October 23, the Cellular Operators Association of India (COAI) along with five GSM (Global System for Mobile Communications) operators – Aircel Cellular, Bharti Airtel, Idea Cellular, Spice Communications and Vodafone Essar — filed a petition before the Telecom Disputes Settlement and Appellate Tribunal (TDSAT) against the Department of Telecommunications (DoT) and the Telecom Regulatory Authority of India (TRAI).

Two days later, top officials in the DoT sent a note to the Union Minister for Communications & Information Technology, A Raja, stating that auctioning of electromagnetic spectrum — or radio frequencies used for cellular mobile telecommunication services — would be the best method of allocating spectrum that could withstand legal scrutiny.

The cat was finally out of the bag. His officials had picked up courage to turn against him. Bureaucrats in the DoT, normally rather subservient to the Minister, had read the writing on the wall. They realised the path that had been chosen by the new Communications Minister belonging to the Dravida Munnetra Kazhagam (DMK) was fraught with legal and moral dilemmas. They understood if they went along with Raja’s flawed “first come, first served” method of issuing new licences and allocating spectrum, they would be colluding in a gigantic fraud being sought to be perpetrated on the Indian people; a fraud that would result in a loss not less than Rs 10,000 crore or US$ 2.5 billion to the country’s exchequer.

It is worth recalling that Raja’s predecessor Dayanidhi Maran (who fell out of favour with DMK supremo and Tamil Nadu Chief Minister Muthuvel Karunanidhi) had announced that global auctions were the best way to allot spectrum, weeks before he was unceremoniously sacked as Minister for Communications & Information Technology in May.

For several months, Raja has disingenuously maintained that he is in favour of the “first come, first served” policy for allocating spectrum and that he was not in favour of auctioning second generation (2G) spectrum, as operators would pass on the cost of winning the auction to subscribers. Raja reiterated his stand publicly as late as on the morning of October 25 when he was questioned by journalists on the sidelines of a function organised by an industry association. However, that afternoon, senior DoT officials sent Raja a note outlining three options for allocating spectrum to the 46 corporate entities that had made 575 applications for providing telecom services in the 23 ‘circles’/service areas (or geographical regions) in the country before the cut-off date of accepting applications of October 1. Fifteen of the 46 companies had applied for all-India licences. The average number of applications per circle worked out to 26.

The valuation of spectrum – a scarce national resource — can be determined on the basis of the price-earnings multiples of shares of telecom companies that have made initial public offerings in the recent past, firms such as Idea, Spice or Bharti. One could also value spectrum on the basis of the US$ 11.1 billion price paid in May by UK-based Vodafone for the purchase of 67 percent equity stake in Hutch-Essar. Alternately, the value of spectrum could be determined by a transparent system of open auction.

Each operator currently has to pay an entry free of roughly Rs 1,651 crore for an all-India licence to provide mobile phone services. Against this amount, the prevailing market price – as will be subsequently explained – is three to four times higher or between Rs 4,500 crore and Rs 5,000 crore. In other words, if this system is used to issue three all-India licences, the loss to the government would exceed Rs 10,000 crore.

Significantly, the October 25 note prepared by top DoT bureaucrats may help scotch Raja’s plans that are tantamount to the government bestowing favours on a clutch of operators using CDMA (Code Division Multiple Access, a rival technology to GSM) technology. This was a consequence of the October 19 decision of the DoT to permit CDMA operators — Reliance Communications, Tata Teleservices, and HFCL Infotel — to provide telecom services using GSM technology. The note says in case the government decides to go in for an auction of spectrum, then these operators may be asked to participate in the competitive bidding process. The note further said spectrum may not be released to these operators if they did not take part in the auction.

The note was prepared by the DoT Secretary D.S. Mathur, together with his senior most officials in the Telecom Commission, its Member-Services, Member-Technology, Legal Advisor, Joint Secretary and Deputy Director General-Access Services. The note said although the government may choose to continue with the existing “first come, first served” policy, auctioning of spectrum or granting of licences would bring in substantial additional revenue to the national exchequer. Under the existing policy, Reliance would be the first to get spectrum, jumping ahead of several GSM operators, some of whom have been in the queue waiting for spectrum for over two years.
The DoT note suggested that bids could be invited either for a licence or for spectrum. In both cases, applicants would be asked to pay a fee for qualifying (Rs 1,651 crore for a pan-Indian licence) though the fee would be refunded to those companies who failed to win the bid.
The first option, the October 25 note states, would be to issue letters of intent to all companies that meet the eligibility criterion and then give them 15 days to deposit the requisite entry fees, bank guarantees and other documents.

The DoT devoted maximum space to the second option, arguing it is the best policy. It pointed out that the current entry fee of Rs 1,651 crore is based on bids received during the auctions for the fourth cellular operator per circle in 2001. As the sector has expanded considerable since then, a new auction process would help establish (or discover) the entry fee based on current market realities.

In 2001, the total mobile telephone subscriber base in India was 4.2 million. Furthermore, it was projected by the DoT then that after seven years, that is, by 2007-08, the total size of the subscriber base of mobile telephones in the country would be in the region of 10 million. As is common knowledge, these projections turned out to be gross underestimates. India’s mobile subscriber base is already in excess of 200 million and current projections are this number could well rise to 500 million by 2011 and to 750 million by 2017.

To return to the DoT note, it suggests either a “three-stage informed ascending” auction or an “online” one for allocation of spectrum with a reserve price of Rs 1,651 crore. If this policy is adopted, the DoT is in favour of all 46 applicants participating in the auction, including the existing CDMA players who wish to offer GSM services. Slots will be fixed for initial spectrum and priority assigned to the highest bidder, followed by other bidders in a descending order. The auction will be conducted not for spectrum, but for licenses with assured allotment of initial spectrum subject to availability.

This second option supports the “no capping of the number of operators” policy in a circle, as had been recommended by TRAI on October 19 and accepted by the DoT. However, this option replaces the “first come, first served” criteria by ensuring entry with assured grant of spectrum through auction, the DoT note explains.

The third option suggested is also related to auctioning. The only difference in this case is that all the 46 companies that have made 575 applications are issued letters of intent, but it would be made clear to all the applicants that spectrum would be allotted only through an open auction. Those who fail in the auction would get a refund of the entry fee paid by them to the DoT along with token interest. Minister Raja has said he would consult the Law Ministry and the Solicitor General before taking a final decision.

Although quite a few of the 575 applicants for new licenses – some of them with rather strange-sounding names – are considered non-serious, the telecom business in India is no longer for the faint-hearted. Players have to have rather deep pockets. The current capital cost of building an all-India telecom services network is approximately Rs 30,000 crore spread out over a three-year period. Many of the 46 companies that have bunged in 575 applications for licences have no background in telecom at all. Many are making applications in the hope that would be able to sell their interests in the companies they control after receiving applications. One applicant told Realpolitik in confidence that he had personally received an offer of over US$ 1 billion or nearly Rs 4,000 crore if he was able to obtain a licence.

It is a debatable issue whether auctioning is the best policy even though it is the most transparent. Experience has shown that the world over, most winners of telecom auctions have not even been able to honour their bids and have gone bankrupt. More importantly, auctioning of spectrum may violate the legal contracts the government has signed with existing GSM operators. (See accompanying story “Are Spectrum Auctions the Way to Go?”) What is clear is there will be acrimonious litigation no matter what decision the government takes. On October 23, the COAI and five GSM operators challenged the DoT’s October 19 decision to permit CDMA operators to offer GSM services before the TDSAT (see extracts of COAI’s petition). Within a few hours of DoT’s announcement, the largest CDMA operator, Reliance Communications of the Anil Ambani group, paid the DoT Rs 1,651 crores as licence fee for offering GSM services on a nationwide basis. Thereby, the company jumped to the top of the queue for allotment of 2G spectrum. The second largest CDMA operator, Tata Teleservices, also announced its decision to offer GSM services in 22 circles. These would have pushed some GSM license holders such as Aircel and Idea who had been waiting for spectrum for over two years, further down in the queue.
TDSAT Chairman Justice Arun Kumar adjourned the hearing on COAI’s petition until November 12 after the Solicitor General of India, Goolam E. Vahanvati, appearing for the Union government and the DoT, told the tribunal that spectrum would be allocated only after the committee in the Telecom Engineering Centre (the technical wing of the DoT) submits its report on its efficient. While this report is expected to be completed by October 30, COAI has shot off a letter to DoT requesting its nominee be made part of the TEC committee.

With the change in the subscriber-linked criteria (by as much as 700 percent in some cases) for allocation of additional spectrum, GSM players would have to wait for periods between one year and three years while several new applicants would obtain this precious resource. Bharti currently has not more than 8 MHz of spectrum in 20 out of its 22 service areas – it would need between 1.5 million and 3 million subscribers in 12 areas to reach the 8 MHz level and between 2 million and 5 million subscribers to reach the 10 MHz level. Vodafone would find it even tougher to reach the new subscriber numbers – in 13 out of its 16 service areas, it has barely 8 MHz of spectrum (with 6.2 MHz or less in nine areas). And, by the time it does, there would probably be no spectrum left to allocate.

Idea has less than 8 MHz in nine out of the 11 circles it is operating in. The entry of Reliance has pushed Idea’s nine applications down the pecking order although these were made a year-and-a-half ago. Spice, which has received spectrum in Punjab and Karnataka, will also find that its 20 applications submitted in August 2006 have moved down in the order of ranking.
Meanwhile, the Tata Group submitted applications for GSM spectrum in 20 circles – it does not operate in two circles, Jammu & Kashmir and the North East. The Tatas stand to gain under the new policy regime having moved to the third position from the top. They do not need either a letter of intent or a licence; they need to merely write a letter and make the payment.

COAI claims that under the Unified Access Service Licence, the licensee has to choose either CDMA or GSM technologies for allocation of spectrum and can not be granted spectrum for both technologies. COAI has relied on Clause 23.1 of the UAS Licence which states: “The licensee shall provide the details of the technology proposed to be deployed for operation of the service ... ”, as well as on the contentious Clause 43 of the UASL (see boxes on the text of the clause and legal opinion on it).

In the past, all telecom licences or license and spectrum bundled together were auctioned to the highest bidder while those in second or third positions were asked to match the price quoted by the highest bidder. In 1995, the open bidding system followed by the DoT resulted in at least 30 global multinational corporations participating in the bidding process.

In 2001, when the fourth mobile licence in telecom circles was given, there was a three-stage informed bidding process. This was when the spectrum price discovery of Rs 1,651 crore was made. The Reliance and the Tata groups, both of which entered the market immediately after the fourth mobile telephony licence allowed conversion of "limited" mobility to "full" mobility, were both "compelled" to pay the benchmark price that was relevant six years ago, that is, Rs 1,651 crore for each pan-Indian license. Reliance had to pay an additional penalty of roughly Rs 450 crore for allegedly misusing its licence.

The short point simply is there has not been a single occasion in the past in India when any mobile licence or a licence-cum-spectrum allocation has been made except through a process of open and transparent bidding. It is in this context that the position adopted by the industry regulator, TRAI, appears rather curious, convoluted and certainly not convincing to many (see box). In its recommendations made on August 29, the TRAI first concluded that the current entry fee (of Rs 1,651 crore) is outdated and that there was a need for discovering the genuine price of spectrum through a market-based mechanism. However, having admitted that the price may be too low, TRAI curiously concluded that the government should continue with the legacy system of payment the entry fee.

The TRAI tried to explain that the revenue share paid by operators is also meant for the government and should be considered as part of the cost of the license. What this rationale clearly ignores is the fact that this is already true for existing operators. In other words, the TRAI itself has cast a doubt on the level of revenue share. It can be effectively argued that the revenue share (which is equal for all operators) as well as the entry fee (also equal for all operators) must not and should not be the key determinant to select which firm should be given granted a licence.
The TRAI has curiously concluded:
* even though the spectrum price is too low, the legacy format should be continued with;
* even though there is a need to discover the market price of spectrum, a system of open auction needs to be ruled out; and
* revenue share comes into play only post-entry and has no role to play in selecting legitimate winners.

For quite a few months now, there have been expectations that the Defence Ministry would release roughly 25 MHz of spectrum but this has not yet happened. Given the fact that the bare minimum spectrum that would be required to build a telecom network would be in the region of 6.2 MHz, it seems certain that not more than two or three new licensees would be able to enter this already-crowded market.

What seems reasonably clear at present is that a host of big names would be nowhere in the reckoning. Such names include those of real estate giants DLF and Unitech, consumer electronics and white goods bigwig Videocon, financial services group Indiabulls, aviation company Spice Jet, the diversified Mahindra group and the steel–making Ispat group, besides the giant U.S. corporation AT&T.

A new operator is normally provided 4.4 Mhz to start operations. This would imply that three new players can be accommodated in each telecom circle. Players already holding licences (Aircell, Vodafone and Idea) will have to be given spectrum first, followed by operators (such as Spice and Idea) that have placed applications to expand their respective networks to new telecom circles in the country. Private telecom players – especially the GSM lobby -- are right now most unhappy that the government has already released additional spectrum to two telecom companies in the public sector, Bharat Sanchar Nigam Limited and Mahanagar Telephone Nigam Limited.
Industry analysts contend that the “first come, first served” system would, in effect, create a black
market for licences by encouraging hoarding and bribery. By following an unscientific and patently
arbitrary system of allocating a valuable national resource that is in acute short supply, namely,
electromagnetic spectrum, the government will end up losing a huge amount of money while, at
the same time, being held responsible for blatantly favouring a few firms.