[Economy] 2G scam, Spectrum refarming, Sistema controversy, Allocation of Natural Resources explained

1. What is Spectrum?
2. Method #1: First come First Serve basis
3. Method#2: Auctioning method
4. What happened in 2G scam?
5. A.Raja (Telecom Ministry)
6. CAG estimate: 1.7 lakh crore loss
7. Supreme Court verdict
8. Presidential reference on SC verdict
9. Impact of SC verdict
10. Sistema – Russia Angle
11. Spectrum Refarming

Continuing the series of technically not-so-correct articles on economy.
What is Spectrum?

• Whenever you watch TV, receive phone call, send SMS, surf internet….data is being transferred from one place to another, say Ahmedabad to Mumbai.
• So, If data was a “truck”, how would you transport it from A’bad to Mumbai (or vice versa)?
• Obviously via highway.
• Spectrum is that highway.

Based on the ‘width’ of the highways, we classify them into following

Spectrum range

Cable TV	145-860MHz
2G	800-1900MHz
3G	2100MHz
4G, broadband internet	2300MHz

(^numbers for illustration only. Different websites will give different numbers.)

• So, We first send the truck from A’bad to a Satellite hovering in the sky, and from there, send the truck to Mumbai.
• Problem: satellite=expensive. Private Player(Businessman) cannot afford it.
• Solution: Government launches the satellite using ISRO. Thus the highway (spectrum), is created. Then Government will charge money to whoever(cellphone company) uses this highway (spectrum).

• You’re a businessman, you want to launch your own mobile service (like Vodafone, Airtel etc). Therefore you’re interested in using this 2G highway, to transport your trucks (data). You can also use 3G or 4G, which provide faster data transfer, but they’re more expensive.

New Problem: to access this 2G highway, you need two things

Problem (businessman’s side)	Solution
Driver’s License (to operate the truck)	Apply to Department of Telecom.
Pay rent/toll for using this highway (spectrum). Just like you pay for using Bandra-Worli sea-link or Yamuna Expressway.	Get loan from SBI.Pay the money to Government. Or even better, bribe minister so they give free spectrum.

Highways have fixed capacity. So Government cannot give license to 500000 truck-drivers else, it’ll create traffic jam. So, From Government’s side what should be the “ideal” solution?

1. Check the application of driver: does he have previous experience of running telecom business? and more importantly his class 10,12 and college marksheets and school leaving certificate.
2. After verifying his record, Sell the access to this highway (Spectrum).

Another problem: how should Government sell access to this Highway (Spectrum)?
Ans. Two methods, 1) first come first serve 2) Auction.
Both have their advantages and problems.

Method #1: First come First Serve basis

• You already know how cinema tickets are sold. The person who is first in the line, gets the ticket. If You come late, you don’t get the ticket.
• This also leads to ticket black-marketeering, for example, I come early, buy all the tickets. You come late, all the tickets are sold, I offer my tickets to you @higher price and make huge profit.
• This is not good for economy because I’m making money without producing any new goods/services=inflation.
• But according to a theory propounded by Mr.Sibbal, this is “zero loss”. Because Cinema hall did receive money for ticket sale. So it’s not like Cinema-hall making losses!

anyways, for common men:

1. Buying ticket=not crime.
2. Buying ticket but not watching movie AND selling that ticket to third person @higher price=crime.

Method#2: Auctioning method

• As the name suggest, Auction the tickets. If person A offers Rs.200 for a seat and Person B offers Rs. 500 for the same seat, then sell the ticket to Person B.
• From theatre owner (Govt)’s point of view: this method may look good, because now we can earn more money per ticket sold and use that money to finance whatever Development scheme we’ve in our mind.
• Here is the problem: if Person B was a doctor, and he had to shell out Rs.500 for one movie ticket. Then he may charge more fees from patients @his clinic to keep the profit margin same.
• So overall effect on economy= may not be good.

What happened in 2G scam?
Recall that you needed two things to run telecom business

1. Driver’s license
2. Access to Spectrum (via paying the money to Government)

Government decided that

1. We will give license by “First come first serve basis”.
2. To get this license, you’ll have to apply before 1^st October 2007 and pay money (Entry Fees) for license.
3. And whoever gets the license, he will automatically get spectrum for free. So no need to pay separate money for accessing highway(spectrum). This is known as “Spectrum linked with License”.
4. If we give you the licence (+spectrum), then you’ll have to cover 10 per cent district headquarters within the first year of the allotment (i.e. you start serving customers in that area). This is known as “Roll out Obligation.”

And then, what happened next, is a classic case of cinema ticket black-marketeering.

Swan Telecom(Shahid Balwa)

• A new company, it had no experience of running telecom business.
• Yet it applied for license and got it.
• (officially) SWAN telecom paid about Rs.1,500 crores to Government, as 2G Spectrum License fees.
• But this company did not open a single outlet/mobile tower. So it didnot meet the “Roll out Obligation”.
• It simply sold 45% stakes to UAE’s Etisalat for around 6000 crore rupees. Calculate the profit%.
• Shahid Balwa was arrested in 2011, released on bail, thus proving that he is totally awesome.
• His argument in the court, “Since Mr Sibal and the PM have both said that there was “no loss” to the government from the allcoation of licenses in 2008, so I’m being wrongly accused of corruption and conspiracy.”

Unitech (Sanjay Chandra)

• This company didnot have any prior experiance of telecom business.
• Yet, Applied for license, paid $365 million as licence fee to Government.
• Did not open any outlet/mobile tower.
• Then sold 60% stakes to Norway’s Talenor for $1.36 billion= huge profit without doing anything.
• Thus name of company changes: Unitech+Talenor=Uninor.
• Recall: bought the ticket, did not watch the movie and sold the ticket to third party @higher price.

A.Raja (Telecom Ministry)

• Ignored the advice of PM, Finance Ministry, Law ministry, TRAI etc.
• TRAI had advice Raja to sell the spectrum via ‘auctioning’.
• But Raja used “first come first serve basis.”
• Licenses were sold in 2008 but the price (entry fees) were kept very low @2001’s market rates.
• Initially the last date to apply for licenses = 1^st October 2007. But then Raja changed policy “we’ll give license to only those companies who applied before 25^th Sept.” This way later-comers could not get license (and had to buy it from ‘black market’).
• He allowed ineligible companies to apply and get license (e.g. Unitech)
• The companies who got license but did not start business (UNITECH and SWAN)…Raja did not take action against them. He should have cancelled their licenses or imposed heavy fines on them.
• Companies paid him the bribes, he transferred money to bank accounts under his wife’s name in Mauritius and Seychelles.
• Arrested in 2011, got bail in 2012, came back in parliament, thus proving that he is totally (and that means totally) awesome.

Kanimozhi

• DMK MP, Daughter of Karunanidhi.
• Shahid Balwa (SWAN) got benefit because of Raja. So he had to pay the ‘bribe’.
• He transferred Rs.200 crores to “Kalaignar TV channel”, which is owned by Kanimozhi and her step mom Dayalu Amma and other family members.
• Arrested in 2011, got bail in 2012, came back in parliament, thus proving that she too, is totally awesome.

Neera Radia

• There are some phone-tapes, in which this lady is talking with Barkha Dutt (NDTV fame).
• To put this bluntly, Radia allegedly paid money to Congress party, to get Raja appointed as telecom minister. Then Raja could use the office to benefit particular companies in 2G auction (who had financed his ‘posting’).
• This phone scandal is known as “Radia Gate”.
• Only questioned, not arrested, and it is said that she wore a Kashmiri shawl worth Rs.1 lakh during questioning by Enforcement Directorate, so she too is totally awesome.
• Now that shawl has become so recognisable that Kashmiri shawl sellers have started referring to it as the Radia shawl and sales of it have shot up= good for economy, GDP increased.

There are some other players too- RK Chandolia, Siddharth Behura et al, but you get the idea- they too are totally awesome.
CAG: 1.7 lakh crore loss

• The 122 2G licenses were given by Raja for over Rs 9,000 crore.
• While 3G auctions for a smaller number of licenses had fetched the government a sum of Rs 69,000 crore.
• Therefore Government has lost money (Besides, whatever money made by ticket black-marketeers, is loss to the cinema hall owner)
• The question remains, how much money was lost?
• CAG says Government lost Rs.1.76 lakh crores, it has come to this figure, using extrapolations from

1. licenses were sold in 2008, @the MRP of 2001
2. The money received from 3G auction vs the money recieved from 2G license.
3. 2G Spectrum was allotted for free. (recall Government only asked for entry-fees for licenses. Spectrum was linked with License). 2G-Spectrum should have been auctioned.
4. Profit made by Swan and Unitech etc. through black-marketeering.

Parliament -JPC
In Feb-2011, Parliament Constituted a Joint parliamentary Committee to probe the 2G scam. No “real” progress so far.

Supreme Court verdict

• Subramanian Swami, filled a petition in Supreme court, regarding the irregularities in 2G Auction.
• The case went on, finally in Feb 2012, The Supreme Court cancelled 122 licenses issued in 2008, by A Raja when he was Telecom Minister.
• Supreme Court said, these licenses were granted in an “arbitrary and unconstitutional” manner.
• SC asked the Telecom Regulatory Authority of India (TRAI) to recommend a new process of allocation of licenses, along with guidelines for an auction of spectrum.
• Supreme Court has also ordered Government to finish the auctioning before Jan-2013.

Presidential reference on SC verdict

• After above verdict of Supreme court, Government decided to get clarification, on whether should every natural resources (coal, gas, petroleum, water etc) be allotted through auction only. (although technically “Spectrum” is not a natural resource, it is generated because of man made satellites.)
• But, Mohan cannot just call any SC judge and seek clarification. A procedure has to be followed.
• Through Article 143 of the Indian constitution, the president can refer matters of public interest to the Supreme Court and seek their opinion. This is known as “Presidential Reference”.
• Here, first the Cabinet headed by Mohan approves a resolution that “WE need to send presidential reference in this xyz matter.”
• Letter goes to President of India, then he/she sends a new letter to Supreme court asking “what should be done in this XYZ matter?”

Supreme court on Presidential Reference

• Supreme court said auction cannot be the only method of allocating natural resources, it should be considered on a case-by-case basis.
• Earning maximum revenue is secondary to serving the public good in allocating natural resources.
• But if allocation of a particular resource is going to get sudden huge profit to a company, then such resource should be allotted through auction only. (for example 2G spectrum).
• In anycase, all decisions and actions of the government are open to being questioned by the court.

Apart from that, a committee on allocation of natural resources, headed by Ashok Chawla, also recommended the adoption of a transparent and competitive process for the allocation of natural resources.
Impact of License Cancellation by Supreme Court
Customers

• Since the license are scrapped, and new auction will be held = input cost of mobile companies will increase.
• So, They’ll increase the call-rates to keep the profit margin same.
• Therefore final consumer (common men) become the innocent victim in this game.

Foreign Investors

• Norway’s Talenor and UAE’s Etisalat Company had paid heavy price to invest in the telecom sector of India.
• But since the licenses are cancelled, in future, the foreign investors will be extremely cautious before investing in India, particularly in the sectors related with “allocation” of spectrum, coal mines etc.

Government

• The reputation of Government =already down. So in terms of reputation they’ve got nothing to lose.
• They make excuse that 1) 2G =Zero loss. 2) Since licenses were not auctioned = companies got them cheap = call rates were cheaper = public benefited from this.
• Congi Government also maintains that we merely followed the policy of NDA (BJP), i.e. spectrum was linked with license and first-come-first serve basis. So, if our seniors did brutal ragging on us in the hostel, then we too will continue the glorious tradition by brutally ragging our juniors.
• Anyway nobody is a saint when it comes to allotment of land, coal reserves, spectrum etc be it congress, BJP, state Government, union Government. because everybody needs truckload of cash to finance election campaigns.
• Now Government will auction some 2G spectrum in Nov 2012 and expects to earn around Rs.40,000 crores.
• And this money could be used to solve the fiscal deficit problem (click me) or to finance any new Government schemes for poor people.

Banks

• SBI, PNB and other banks had landed to some of those telecom companies and now licenses are cancelled, so loan-money is stuck.
• Anyways, nothing new for SBI- their loan-money is stuck with Vijay Mallya (Kingfisher) also.

Innocent aspirants of competitive exams

• They’ve to prepare one more stupid topic for exams/group discussion /interview.
• Anyways, nothing new for them either, they’re used to this irony of life.

Sistema –Russia issue

• Just like Telenor (Norway) and Etilsat (UAE), Sistema (Russia) is also a foreign telecom company.
• Sistema had bought stakes in an India company (Shyam Telecom), but then Supreme court cancelled their license.
• Now Sistema has appealed the Supreme court to restore its license, current matter is pending in court.
• In the light of this event, Russian Government has warned India that

1. “If the issue of cancellation of 2G license to Sistema is not resolved in Indian courts, we will go for international arbitration.” (because Russian Government too holds about 17% in this Sistema-Shyam telecom company.)
2. Row over Sistema will have “great repercussion” not only on Indo-Russian bilateral cooperation but also for foreign investments in India.
3. We will not let Sistema’s USD 3.1 billion investment in its Indian telecom venture go waste due to “internal problems” here.

Spectrum Refarming

• This is a separate issue, not directly associated with 2G Scam of A.Raja.
• In 2001, some companies got License + free spectrum (900 Mhz). (recall that Spectrum was linked with the license.)
• They’ve to renew their license in 2014.
• But now Government has changed policy. According to new policy, Spectrum is de-linked from License. So you’ve to apply for license separately and you have to purchase spectrum separately (through auction).
• Telecom Regulatory Authority of India (Trai) has suggested that existing mobile operators will have to surrender the spectrum in the 900 Mhz band at the time of license renewal in 2014.
• And then, this 900 Mhz spectrum will be auctioned again.
• Under this so called “Spectrum-refarming” process, if the companies manage to win in the auctions, they will be able to retain the spectrum or, in lieu, they would be given the 1,800 MHz spectrum via another auction.
• Telecom companies are against this decision.
• Their argument, “we’ve already invested more than one lakh crore rupees in machinery, mobile tower, other infrastructure for 900Mhz spectrum. If you take this away and give us new type of spectrum, we’ll have to buy new machines=we’ll increase call rate price to cover the losses”.
• The matter will now be decided by Empowered group of ministers (EGoM).

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