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Telecom Torment

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The decision of the Supreme Court of India in the 2G scam case is perfect illustration that it is a whole lot easier to rant and rave about corruption than to actually do anything about it. Recall that when fixation with revenue losses was at its peak, the Controller and Auditor General of India estimated that telecom minister, A. Raja, had lost the government Rs 1, 76,645 crore. The Central Bureau of Investigation paired this down to Rs 30,984.55 crore. So while everyone cheered when the Supreme Court intervened, we now stare at the spectre of a government with accumulated potential liabilities it may not be able to sustain.

As the situation stands today, the government is liable to return all the license fees it has collected from these companies. We have Russian telecom company Sistema, which risks losing Rs 12,500 crore spent so far in acquiring the licenses and rolling out the service, seeking to protect its investment under the Indo Russian Bilateral Investment Treaty. C. Sivasankaran, who bought out his foreign partner, wants to be paid the Rs 1,700 crore that was put in by S Tel. Loop Telecom wants to be paid Rs 1,454 crore to surrender its licenses. Telenor is issuing masterly understatements about its investments of Rs 6,100 crore in equity and Rs 8,000 crore in corporate guarantees. Another dozen companies have spent varying hundreds or thousands of crore each in acquiring licenses and rolling out networks. Which loss is greater now: Raja's choices or the 2G judgment?

The legal heart of the issue is simple. If your counterparty commits a crime and your contract with this party is terminated by a court, are you entitled to compensation? Forget about losses to the exchequer, the Government of India is down in a hole for more money than anyone has cared to count just yet.

You could well ask the question: did the Supreme Court see what was coming? In truth, the Supreme Court was not terribly concerned with the fate of the companies who stood to lose their licenses. It set out to answer this question: could the government transfer natural resources without following a fair and transparent policy? In answering this question, it reasoned that spectrum is a national asset entrusted with the government for use in the public interest alone. In its allocation, all applicants must be treated equally. It observed that this has two aspects. First, equality demands that the people must be fairly compensated if a natural resource is converted to private use. Second, the government cannot adopt a procedure that is unjust, arbitrary, opaque or discriminatory between similarly placed private parties.

That finding took the court into an examination of the government's policy on the point. It noted that TRAI itself believed that the current criterion for allocation of spectrum and its pricing was deficient. It determined that to allocate spectrum at 2001 prices in these circumstances was illegal. The court noted that while spectrum was "gifted" to certain companies, these same companies then off loaded stakes to third party foreign companies at fantastic mark-ups thus reaping super profits.

Whether spectrum can be allocated on a first-come-first-served basis was the third question considered by the court. The court held that the element of chance inherent in such policy catapulted anyone with special access to government to the head of the queue. The court also suggested that the government has engaged in some suspect internal manoeuvres in order to achieve a pre-mediated result. On the face of these facts, the court was then left with no choice but to quash the award of spectrum. Bear in mind that the court did not decide that spectrum allottees had purchased their licenses by a back door. It did not determine anyone's culpability. How then could companies be penalised for crimes they did not commit?

In point of fact, these companies did raise these issues. They argued that the policy was public knowledge for months and there was no question of anyone jumping the queue. They argued that many of them had applied in 2004 and 2006, and had nothing to do with Raja's shenanigans. They argued that if the 2001 first-come-first-served policy was unconstitutional, then every license granted since 2001 should be cancelled. They argued that licensees had managed to get in vast sums of money by way of foreign investment to build networks in remote areas which would benefit vast numbers of deprived people. They argued that they had invested thousands of crore in infrastructures and cancelling the licenses was not in the public interest. The court either completely ignored these arguments or perfunctorily dismissed them out of hand. The issue was decided on the basis of policy and the question whether these companies should take a bullet in the gut was not addressed. Unfortunately, this is indeed how the law works. We have been there before.

Recall that in May 2011 (see Pandora's Real Estate Box), the Supreme Court cancelled the acquisition of vast swatches of land in Greater Noida on which residential and commercial developments were already well underway. The government had colourably invoked its power to pre-emptorily acquire land that was not required for the purpose for which it was acquired. Allegations of vast payoff by builders to the government of the day were in common circulation. Even so, the fact of the matter was that these property developments had been presold to end customers. If the land acquisitions were cancelled, the property buyers would get it in the neck.

Given how the law is structured, the Supreme Court cancelled the allotments without factoring in the property buyers. Did this mean that property buyers got their money back with interest? Did this mean that the original owners reclaimed the land, tore down the partially built structures, re-established their farms and went back to their utopian rural paradise? Of course not! The farmers took more money and settled the matter, the builders passed on the added cost to the end purchaser and all the players in the game save the buyers lived happily ever after. Something similar is inevitable in the 2G case. The mechanism by which this will happen will become clear in the days to come.

What is clear already can be shared. As matters stand, the government faces huge potential liabilities for the sins of its minister. Suing the government is not what many foreign investors come to India to do but their difficulties have to be addressed. In the long run, with some policy tweaks, the government may be none the worse for its predicament. If you go by the loss-to-exchequer numbers, the government is in for a bonanza. Circumspect experts argue that with banks now unwilling to take further exposure, spectrum bids are likely to be modest. Other experts suggest that the government could pick up Rs 65,000 to 75,000 crore in a fresh auction. It seems to me that the government's first task is to make sure that Raja's licensees get spectrum as soon as possible because the government must avoid potential liabilities flowing from the 2G judgment. It has already made this move by telling the Supreme Court that it is simply unable to auction the spectrum any time soon. In effect, it is now trying to claw back the termination of the licenses. If and when it does auction the spectrum afresh, at whatever cost, you can be sure that the additional cost will be passed through to the customer.

Given these realities, you could ask yourself what the Supreme Court was doing getting Shahid Balwa's Rs 200 crore back from Raja and hitting the people of India with a bill of Rs 75,000 crore. Thus, the difficulty with questions of the type raised by the 2G case, become easier to see. Every policy, administrative or judicial option imposes a cost: somebody or the other pays the bill. If you give away spectrum cheap, companies tend to benefit but if competition drives down prices, the consumer is always the gainer, stimulating the economy as I have observed (see Scam Mela). On the other hand, if you sell spectrum expensive, you pass this bill back to the mobile phone owner. In this day and age, that could be the Lamborghini driving real estate super brat as easily as it could be your dhobi. The government no doubt would be a whole lot richer but that still leaves open the question where it would spend the money. Will it spend it on building highways and hydro projects? Will it instead give the money to legislators to spend on "development schemes" in their constituencies at their sole discretion? Or would it spend the money on some rural upliftment scheme the benefit of which we know will never reach the intended recipient? This is existential angst of a common Indian variety.

To add to the misery, this existential angst applies across the board to all 'public' decisions. Seen thus from inside and above, most options confront the decision maker in shades of gray. So when next we speak of policy paralysis, political impotence, bureaucratic vacillation or judicial reluctance, we must remember that most of the time, it comes down to who gets the free lunch and who gets to wear the dunce cap. This is quite apart from the fact that by the time the Law of Unintended Consequences works itself out, no one will remember what it was that we had set out to do.

The author is managing partner of the Gurgaon-based corporate law firm N South and author of the pioneering business book  Winning Legal Wars He can be contacted at [email protected]