The Farce of Rs.1,76,000 crore!

“Insanity in individuals is something rare - but in groups, parties, nations and epochs, it is the rule.”

-       Friedrich Nietzsche

Following Indian telecom regulator, Telecom Regulatory Authority of India on March 23 submitting its recommendations to be government for increase in the price of spectrum by at least 10 times, there was a hue and cry in the media, the industry and people who had all along during the past two years crying hoarse about ‘monumental spectrum scam of Rs.1,76,000 crore’! They must have been happy that the TRAI, in fact, had recommended for a huge revenue of Rs.7,00,000 crore for the national exchequer through the ‘auction’ of spectrum for which they had all along been clamouring and the Supreme Court also mandated. But, why this faux pas now”.

‘The Times of India’, the group which took pride in boasting that it was the first to unearth this ‘spectrum scam’ reported the following in the first page on April 24 under the headline, ‘Trai for steep rise in 2G spectrum fee, tariff may rise’ :

The telecom regulator on Monday suggested that the government increase the price of spectrum by at least 10 times, raising fears of an increase in mobile tariffs.

While recommending auction as the sole route for granting spectrum, the Telecom Regulatory Authority of India ( Trai) has proposed a floor price of Rs 3,622 crore a megahertz (Mhz) for pan-India spectrum in the 1800 Mhz band, which was allotted to new players by jailed former telecom minister A Raja in January 2008.

At that time, the government had allotted 4.4 Mhz spectrum free with telecom licences for which it had levied a fee of Rs 1,651 crore.

If Trai’s recommendations are accepted, the bidders opting to use GSM technology will have to start bidding for 5 Mhz spectrum at Rs 18,110. For CDMA players too, the minimum cost would be around the same level as they will have to seek 2.5 Mhz spectrum in the 800 Mhz band, where the reserve price has been pegged at Rs 7,244 per Mhz.

The move is expected to hurt the likes of Telenor and Sistema Shyam which had lost licences after Supreme Court ordered the cancellation of 122 licences awarded by Raja and were planning to rebid.

But it isn’t just the newer players who are crying foul. Even Vodafone and Bharti, which have been around since 1994, could be hit if the government accepts the recommendations.

The regulator has suggested that existing players move from the 900 Mhz spectrum band to 1800 Mhz, which will entail massive outgo towards spectrum fees and capital expenditure to upgrade the existing infrastructure.

While the industry is complaining, the government is expected to find it tough to ignore the recommendations given the criticism it has faced over the last few years for doling out spectrum at below market rates. Telecom secretary R Chandrasekhar told a TV channel that the floor price should not be viewed in isolation as the spectrum usage charge is proposed to be cut and airwaves will be available for 20 years.

The telecom companies did not buy the argument. “These valuations are absolutely absurd. If companies were to start charging for the kind of bids that we will have to submit, call rates can go up to Rs 5 a minute (from a low of 30 paise a minute now),” said an executive with a new entrant.

“Trai recommendations on the hike in reserve prices appear significantly on the higher side and is likely to be a strain on the resources of the bidders, especially with a highly competitive market landscape... Higher reserve price & resultant auction price is likely to lead to an increase in tariffs by service providers,” added Jaideep Ghosh, partner at consulting firm KPMG India.

Some of the existing players are also going to be hit by recommendations as the regulator has suggested that auction for 4G spectrum should be undertaken in 2014. As a result, some of the existing players, such as Bharti, may not launch nation-wide operations for a while and compete with Mukesh Ambani’s Reliance Industries.

COAI and Auspi, the lobby groups representing the constantly-warring GSM and CDMA operators, on Monday issued a joint statement criticising Trai’s recommendations.

“Trai’s actions seem to be directed towards creating unnecessary constraints for the sector, overlooking the universal rules of sustainability and growth for this sector. Under such inconsistent, regressive and uncertain regulatory environment, it is inconceivable that the telecom industry, which is already in a state of doldrums, will be able to deliver on the government’s vision of affordable communications, rural penetration and rollout of data services,” the lobby group said.

“We believe that several of these recommendations are retrograde and if accepted, will do irreparable harm to the industry,” Vodafone added.

Some of the industry players are hoping that the government will intervene. “While we study them in detail, it seems obvious that some of these recommendations will create severe negative impact on the entire industry. It is up to the political leadership of India to now ensure that the gains of the past few years of affordable phone calls for India’s people are not undone,” Telenor said in a statement.”

The Group’s business daily ‘The Economic Times’ in its editorial on April 24, ‘Auction Licences’ noted the following point:

Trai’s recommendations have hammered telecom stocks on the bourses, and invited generalised criticism. By the time the government figures out the wheat from the chaff in the Trai recommendations, the court’s deadline would have passed. Further, in both its order of February 2 and in its order of April 24, the court talks of licences in the plural. Clearly, it is not the court’s intention to abort competition or limit it to one additional player. The Trai recommendation, by offering up just 5 MHz of 2G spectrum in the current fiscal, would provide for, at the most, one additional licence. Considering the exorbitant rates Trai has set as the floor price for the spectrum, and with incumbents who have paid next-to-nothing as entry fee for the chunks of spectrum in their possession being allowed to bid, there could well be no fresh licences at all, once auctions are over as per Trai recommendations. This would be against the public interest and against the court’s order to grant more than one fresh licence.

Keep policy revision in abeyance for broader debate. Auction fresh licences and restore businesses to foreign investors who took official clearance to invest in licensees. This is the sensible way to proceed at the moment.”

The crux of the other reports on the day are as follows:

Arbitrary, regressive and inconsistent. This is how the two telecom associations – which are usually at loggerheads since they represent two ends of the telecom spectrum, GSM and CDMA operators – have described the recommendations on spectrum auctions by the Telecom Regulatory Authority of India (TRAI).

In a rare camaraderie, the two associations joined hands to oppose TRAI’s move, which will anyway be subject to government scrutiny and approval.

As per TRAI, a telco will have to shell out Rs 18,100 crore as base price for five mhz block of 2G spectrum. This is higher than even the actual pricing (not the base price) of 3G spectrum post auction in 2010.

The Cellular Operators Association of India (COAI) and the Association of Unified Telecom Service Providers of India (AUSPI) have termed this pricing “arbitrary, regressive and inconsistent” and said it would hinder affordability and rural penetration of telephony.

In fact, the two associations have asked the government to revisit the entire process of spectrum pricing! “From deciding to link the price of 2G spectrum to 3G spectrum auctions, to its own expert committee’s inputs without the application of any logic and unilaterally trying to interpret DoT’s own licence terms like ‘extension’ as ‘renewal’, the regulator’s actions appear to be unfair and biased against all operators for reasons best known to it. The TRAI’s actions seem to be directed towards creating unnecessary constraints for the sector, overlooking the universal rules of sustainability and growth for this sector,” the joint statement said.

It warned of shaking investor confidence further in the Indian telecom market.

Separately, established telcos pointed out that with such steep pricing, the government may not find any bidders at all for spectrum!

They also said that the base price for CDMA operations, set at Rs 3,6000 crore for a five mhz spectrum block, would hurt telcos such as Reliance Communications and Tata Teleservices when their licenses come up for renewal.

But the biggest losers yet may turn out to be players such as Sistema and Telenor, who have already lost licenses and now have to pay a huge base price Rs 18,100 crore for fresh 2G spectrum. In both cases, this money may be much more than they have already invested in the Indian telecom market till now.

Mobile phone tariffs set to rise significantly after telecom regulator TRAI proposed a steep minimum price for auction of 2G telecom spectrum and naturally Cellular Operators Association of India (COAI) and the Association of Unified Telecom Service Providers of India (AUSPI) disapproval of these recommendations and termed them as being arbitrary, regressive and inconsistent.

The regulator, whose recommendations are not binding on the Government, valued 2G spectrum at about Rs7 lakh crore, nearly seven times more than Rs1.04 lakh crore that the Government had received through auction of 3G spectrum in 2010.

 “Industry has repeatedly been facing contradictory and regressive approach from the Regulator which is detrimental to the future of the sector that is often touted as the poster boy of India’s economic reforms. From deciding to link the price of 2G spectrum to 3G spectrum auctions, to its own expert committee’s inputs without the application of any logic; and unilaterally trying to interpret DoT’s own licence terms like ‘extension’ as ‘renewal’, the Regulator’s actions appear to be unfair and biased against all operators for reasons best known to it,” said   COAI and AUSPI.

“The TRAI’s actions seem to be directed towards creating unnecessary constraints for the sector, overlooking the universal rules of sustainability and growth for this sector. Under such inconsistent, regressive and uncertain regulatory environment, it is inconceivable that the telecom industry, which is already in a state of doldrums, will be able to deliver on the Government’s vision of affordable communications, rural penetration and rollout of data services,” added the telecom associations.

Expressing concern at TRAI recommendation, Vodafone said: “We believe that several of these recommendations are retrograde and if accepted, will do irreparable harm to the industry.”

“We hope that the Government will look into this aspect and revisit the entire process. In their current state the guidelines have the potential to derail a sector that is a significant contributor to the National Economy,” said the association.

Deloitte Haskins & Sells said higher price for spectrum may ultimately lead to upward revision in tariffs.  KPMG said TRAI recommendations were “appropriate steps towards efficient utilisation of spectrum” but added that the high reserve price is likely to strain resources of bidders.

Investors gave a thumbs down to TRAI proposals for a near tenfold increase in the price of 2G mobile phone spectrum, viewing the move as yet another blow to companies in the cutthroat sector whose shares tumbled.

India’s telecoms sector, the world’s second-biggest by subscribers, has been battered by ferocious competition and a scandal over the below-market price sale of lucrative mobile phone permits in a 2008 state sale process.

The proposed steep increase in spectrum pricing will make it very expensive for new entrants and is a blow to foreign carriers such as Telenor and Sistema, who will have to repurchase licenses bought in 2008 for a much higher price if they wish to keep a foothold in India.

“It creates further uncertainty for the sector,” said Kunal Bajaj, partner and director of the Indian operations of London-based consultants Analysys Mason.

“The new entrants will have to fight hard to justify a business case at this price,” he said, referring to companies whose permits are being revoked after the court order.

Telenor is likely to quit India rather than pay a much higher price, analysts said, while sources close to Sistema said it would take a writedown of nearly $1 billion because of the suspension of the licenses.

Big payouts also loom for leading Indian mobile carriers Bharti Airtel, Vodafone’s local unit and Idea Cellular if the regulator’s proposals including reallocation of spectrum bands are accepted.

Bharti and Vodafone India, which are not affected by the court order, are interested in buying more spectrum in the auction to feed their overstretched networks, and the steep base price and a restriction on operators holding spectrum beyond a limit does not augur well for them.

More bad news for them is a proposal for refarming, or reallocating, their existing bandwidth “at an early date” before their licences come up for renewal starting in 2014.

Shares in Bharti Airtel fell as much as 7.5 percent on Tuesday to their lowest level since July 2010, while fourth-ranked Idea Cellular slumped as much as 9.8 percent, before cutting some losses. Bharti closed 1.7 percent down at 307.35 rupees, while Idea ended 4.2 percent down at 79.90 rupees. Reliance Communications fell as much as 3.4 per cent.

The reallocation of spectrum may have a potential adverse impact of 32 rupees a share on Bharti’s market value, while Idea’s may be hit by 23 rupees a share, estimated Anand Shanbhag, executive director at Avendus Securities.

“We believe these recommendations are negative for incumbents/new entrants as it will stretch their weak balance sheets and positive for new 4G entrants like Reliance Industries,” Goldman Sachs analysts wrote in note.

GSM industry body COAI said it will approach Prime Minister Manmohan Singh against recommendations made by telecom regulator Trai on spectrum auction.

“We will approach top decision makers in the country - the Prime Minister, Finance Minister, Telecom Minister and EGoM who will be looking into this issue (spectrum auction).

“We would like to present our case in all these forums to ensure that these recommendations are not inconsistent with the government’’s policy,” Cellular Operators Association of India (COAI) Director General Rajan S Mathews said.

He said that the association sees inconsistency between government policy of affordability and reserve price recommended by Telecom Regulatory Authority of India (Trai).

COAI and Association of Unified Telecom Service Providers of India (AUSPI), which represents CDMA and Dual licence holders, have termed Trai’’s recommendations “as being arbitrary, regressive and inconsistent”.

Mathews said that by end of this week COAI will write to the top policy decision makers to highlight issues regarding business funding as well as sustainability.

“Reserve price is the biggest issue we are facing. We are saying that at these reserve prices bringing new people to thebidding process is clearly not a viable proposition,” Mathews said.

He added that maintaing affordability on a network after winning spectrum will be make the business unviable.

“Maintaining affordability in this case would mean there is going to be downward pressure on prices. Raising tariffs is not a very viable proposition,” he said.

Trai Chairman J S Sarma has justified the recommended prices for spectrum saying that the spectrum price has to be paid over period of years and only 33 per cent has to be paid initially.

Mathews said the payment option given by Trai may be helpful but it is not going to work if the project is unsustainable.

“That is what are our concern is. Nobody is going to start project without funding and if the project is going to fail, (then) no bank is going to give us money,” he said.

Mathews said lenders will look at the total project cost and its viability.

It was indeed a blessing in disguise that the Supreme Court, ordered the cancellation of all the 122 licences issued by the most disgraced former Telecom Minister A.Raja, who is now languishing in Tihar jail for over a year. Now, people who fancied 2G spectrum auction that would have fetched Rs.1,76,000 crore income for the government, Comptroller and Auditor General who is at the root of this mad frenzy, the media, all the crusaders against corruption, political parties which gained from the Rs.1,76,000 crore farce… and at last not the least the Supreme Court of India which too believed there was a huge loss and a judge taking strong exception to counsel who argued that there was to scam, will realize the farce of Rs.1,76,000 crore loss/ scam.

In the aftermath of the recommendations of the TRAI, in consonance with the ‘great findings’ of the C&AG, the sustained campaign of the media, the propaganda carried out by political parties including the ADMK and BJP, and last but not least most regrettably the stand taken by the judiciary. What is the state of affair now?

v The fast growing and explaining telecom industry is shell shocked and in disarray fearing steep fall following 10 times increase in the prices of spectrum to be auctioned.

v In the stock exchange, the shares of Telecom companies nose-dived due to apprehensions of middle class shareholders, who incidentally make too much of the so-called ‘spectrum scam’, that the dividends might not be profitable.

v Foreign telecom investors like the Telenor have decided to renounce their stakes in the country and leave India for ever, very much against the letter and spirit of Economic Reforms Policy laying stress on wooing overseas investments ‘by the hook or by crook’.

v Increasing tele-density particularly in rural areas, and filling up the digital divide between urban and rural areas as envisioned in the National Telecom Policy 1999 adopted by Parliament.

v A silent communication revolution which took place likely to be reversed. And at last, the mobile tariff to increase by 1066 per cent from 30 paise per minute to Rs.5 per minute, affecting over 90 crore people using cell phones now.

Why this hullabaloo now by the media and consumers of telecom services following increase in the prices of spectrum to be auctioned and the consequent hike in mobile tariff? After all this was the demand and they had all along been ipso facto voicing ‘by default’ (computer phrase) through their campaign of ‘spectrum scam’!

It is a matter of common sense, which surprisingly never struck to anybody or possibly they feigned thinking over, that any increase in the capital cost of a service will automatically result in hike in the tariff of the service for consumers. The telecom operator companies are no charities. Had they been levied Rs.1,76,000 crore more for 2G spectrum as suggested by the C&AG and approved by the media and judiciary, they would have only collected the investment from the mobile using public. The mobile tariff would have increased manifold!

But now no one can deny the fact that the former Minister A.Raja drastically brought down mobile tariff to 30 paise per minute by introducing more players into the sector and creating a level playing field for all players. Now even the poor people, barring children on the population, if 90 crore people can get benefited by the use of cell phones, it is because of the affordable service that they get. Ironically the mass of these people also get carried away by the scam campaign.

Even while ‘calculating’ the ‘presumed loss’ of Rs.1,76,000 crore in the allotment of 2G spectrum neither the C&AG nor the media demonstrated basic honesty in taking into account the real revenue derived by the government through the ‘Revenue sharing policy’ in place in the system and the projected revenue accruals of around Rs.10,000 crore per year in the years to come; and reduce from his astromical speculation.

And after over two years of investigation, raids, foreign jaunts, seizures of documents and enquires by the CBI, Enforcement Directorate and what not and the investigative media, they could not establish any graft or pecuniary benefits beyond Rs.209 crore taken as loan and repaid with interest – all through banks by means of cheques and duly reported to Income Tax department – by the Kalaignar TV channel. Will anybody receive graft money by cheque and transact it through the banks? If there was loss to the exchequer, who else made the gains? The usage of the spectrum by the telecom companies is metered and they had also filed their returns, profit and loss account and Balance sheets to competent authorities. Which are the companies, if at all there are any, made ‘super profits’ by getting spectrum for ‘lower price?’

All those who raised the bogey of Rs.1,76,000 crore loss to the exchequer, owe answers to the nation and its people whom they had taken for a ride so long and they will also for any ill-effects in the post-action of spectrum period, on the telecom industry and people in mobile tariffs! They should establish that as Indians and India as a nation, they don’t fall in the category noted by Nietzsche!