Impact Analysis of New 2G Mobile Spectrum Policy in India

In the light of the observations made by the Comptroller and Auditor General of India (CAG), on the humongous loss said to have been incurred by the exchequer and in the absence of an effective rebuttal of the same either from the government sources or from the media, the public are led to believe that the exchequer has lost as much as Rs 176645 crores with a corresponding gain to some unscrupulous operators and the intermediaries. That, some of the operators were able to sell the equity in their companies at a handsome premium tends to give credence to such a notion. This writer has made an in-depth study into this and finds that nothing could be farther from the truth. One may add that, as the entry fee was kept low and unchanged in conformity with a stated policy with a laudable objective i. e, to make available the mobile telephony on demand and at affordable rates to all, to work out the losses in so doing was unwarranted. Further, the methodology adopted by the CAG for arriving at the ‘presumptive’ loss was seriously flawed, which resulted in sensationalizing the losses attributed to the alleged irregularities in the issue of 2G licenses in Jan 2008.
As the CAG is a highly respected, independent, apolitical and constitutional authority, one would say that this huge error of judgment by his office has created, distrust among the people of the country of ability of the government of the day for having incurred such a huge loss, brought down the image of the country as one of the most corrupt nations in the world and the minister concerned charged with a crime that he did not commit. Considering the stature of the institution of the CAG, a criticism of this nature, unless vetted by an equally exalted forum, would lack acceptability both among the people of the country as well as across the political spectrum. With that in view, the author has made a detailed presentation, duly supported by facts and figures to the Public Accounts Committee as well as to the Joint Parliamentary Committee for their consideration. A summary of the same is given below.
At the outset it is not the author’s case that the issue of 2G licenses in Jan 2008 was done in a transparent manner. One respects the CAG’s observations in that regard, as they have been well documented and suggestions for not recurring them in the future stated. But in spite of the irregularities, the fact remains that the exchequer did not suffer any loss. This may surprise many, as to how could there be irregularities sans loss? That requires some explaining.
If someone allocates a product that is scarce to ineligible applicants, the price of which for reasons of public interest was kept well below the market rate, one cannot say that there was loss to the exchequer from such wrongful actions; yet there could be a scam, as the beneficiary who got an out-of-turn allotment, would be willing to pay a handsome kickback to the facilitators. There have been several such cases in the past, in the allotment of land, issue of industrial and import licenses in the olden days, the petrol pump scam etc. The 2G scam could, at worst, be one such thing, as 85 out of 122 licenses were allegedly allotted to ineligible entities.
Look at the following facts:
· The CAG’s main accusation that the Licenses were issued in Jan 2008 at an entry fee discovered six years ago hides the fact that, 51 licenses were issued since then at the same entry fee- 26 of them during Jan-April 2004 when Mr Arun Sourie was the Telecom and IT minister and 2 in June/Sep 2004, 22 in Dec 2006, and one in March 2007, all when Mr Dayanidhi Maran was the minister. So all that Mr A Raja did, since he took over as minister for telecom and IT in May 2007, was to keep the entry fee unchanged, for the licenses to be issued in the latter half of 2007, even though the actual release of licenses spilled over to Jan 2008.

· In the year 2001 when the entry fee of Rs 1658 cr was discovered for a Pan-India license, by a transparent process of bidding, the mobile subscriber base was 3.5 million only. By 2004 this had gone up ten folds to 34 million and by March 2007, 48 times to 165 million. However, no questions were asked as to why the entry fee was not increased in view of the exponential growth that has been taking place since 2001, while issuing those 51 licenses. But when Mr Raja continued with the same policy the CAG has commented as under:

“The bidding pattern of 2001 would clearly indicate that the 2001 price was discovered in a nascent market and considering the revolutionary changes in the Indian telecom market since then, there is no doubt in concluding that the same 2001 price did not reflect the true economic value of a license and the spectrum bundled with it in 2008.” [Emphasis added]

Thus, while the CAG accepts the entry fee having been kept at the same level till March 2007, he thinks it should have been increased ten-folds (explained later) in order to reflect the true economic value of the spectrum in the issue of licenses that took place a few months later! The unfairness of this criticism would be loud and clear.

· There were good reasons as to why Mr Arun Shourie and Mr Maran and later Mr Raja kept the entry fee unchanged. For this, one has to go back to The National Telephone Policy-1994 when the licenses were issued for the first time to the private sector operators, based on a transparent process of bidding. The operators overbid and committed a huge amount payable in annual installments upfront, spread over the license period of twenty years. As the market failed to take off, under heavy the burden of fixed charges they all had committed, the industry became sick. The NTP-1999 addressed this issue and took a bold decision to give remission of all outstanding amounts due (Rs 43000 cr ?) for the balance period of 15 years and allowed the operators to migrate to the new policy based on revenue sharing instead. It is important to note the vision contained in The NTP -1999: To make available telephone on demand to all at affordable rates within a short period, by providing equal opportunities and a level playing field for all operators by creating a competitive environment.
· It is well known that a high entry fee would have a cascading effect on the tariff. It would be naïve to think that tariff would remain unchanged despite a steep increase in the fixed entry fee, irrespective of the manner in which it was discovered, because of the competition. That would be like saying that if the truck prices were increased ten-fold, the passenger fare and freight would remain at the same level because of the prevailing competition within the industry. Therefore, the entry fee was kept low and license fee and spectrum charges were levied as a percentage of Adjusted Gross Revenue. Thus having discovered the entry fee by a transparent process for the first time in 2001 since the implementation of NTP-1999, it would have been unfair to the new entrants, if it were to be increased in the subsequent issue of licenses.
· Before the issue of licenses in Jan 2008, there were already 7 Pan-India operators who got licenses at an entry fee of Rs 1658 cr or lower, for servicing all 23 circles in the country. The purpose of issuing new licenses was to increase the competition, for which a level playing field was necessary. Now if the new entrants were issued licenses at ten times the entry fee paid by the former (at Rs 16750 cr for a Pan-India license, as assumed by the CAG in arriving at the loss of Rs 176645 cr, instead Rs 1658 cr, paid by the rest) how would they be able to compete with the old players, who by then (Dec 2007) had a subscriber-base of 234 million? Thus, the rationale for not increasing the entry fee for 51 licenses issued during 2004 and in the year 2006-07 was equally applicable to the issue of 122 licenses contemplated in the later part of 2007 as well.
· For arriving at the loss of Rs 176645 cr, the CAG has equated 2G spectrum with 3G and compared the price realized at 3G-auction in the year 2010 (Rs 16750 cr for an all India license) with the entry fee of Rs 1658 cr charged for 2G since the year 2001. This was unrealistic as 3G is believed to be faster by 10 to 20 times and can carry 3-4 times the volume of traffic. If 2G was equally efficient as 3G, as assumed by the CAG, the existing 2G operators wouldn’t have been so stupid to pay ten times the fees, for availing the 3G license and wait till 2010 in order to roll out value added services. They might as well have provided those services right from the inception, to their 2G subscribers. In case of Mumbai and Delhi circles, the disparity in prices was still higher -16 to 19 times the entry fee paid for 2G. Yet the CAG has considered 2G to be as valuable for arriving at the ‘presumptive’ loss of Rs 176645 cr!
· If there was a loss to the exchequer by keeping the entry fee low, it is fair to presume that there would have been a corresponding gain to the operators, who got the licenses cheap. This in turn would have shown up in their profits. A reduction in the upfront fee payable by Rs 176645 cr, would translate into a cost advantage of Rs 27000 cr p. a, for the industry as a whole, by way of cost of finance and amortization (both together taken at 15 percent) required to be provided. On the contrary, what one has seen is a decline in the profits of the old operators (or increase in the losses of some) and abysmally low revenue of the new operators as shown in the table below.
Profit and market share of Cellular Service providers with Pan-India license

Service ProviderRs croresMarket share on 31-03-2011
2009-102010-11 *
Sales Net ProfitSales Net Profit
Bharti Airtel35610942638016771720.0%
Idea Cellular1185010541538984511.0%
Reliance Communications 1355547912130-76516.7%
Tata Teleservices 2210-2987359-95111.0%
Total for 4 companies632251066172894684658.7%
Vodafone 16.6%
BSNL/MTNL 12.0%
Aircel 6.8%
Total for 7 pan-India operators94.1%
Total mobile subscribers (Million)811.6
1. * The results for the year 2010-11 are unaudited
2. Vodafone is believed to be highly profitable, but being an unlisted company its results are not available.

The four listed companies stated above had a market share of 59 percent. Yet their combined net profit declined from Rs 10661 cr in FY 2010 to Rs 6846 cr in FY 2011, in spite of an increase in the mobile subscriber base from 584 m in March 2010 to 811 m in March 2011. It is significant to note that both Rcom and Tata Tele remained in the red in FY 2011. The public sector operators BSNL/MTNL are reported to be making huge losses. (MTNL incurred a net loss of Rs 3064 crores in 2009-10. Its unaudited loss for the year 2010-11was reported at Rs 2800 crores). A recent industry survey shows the plight of some of the new entrants whose average revenue per user (ARPU) p. m, for quarter ended March 2011 plummeted to Rs 38 per month and for one an abysmal Rs 8.50! This is indicative of the fact that the industry does not have the capacity to absorb the cost associated with a huge entry fee of Rs 176645 cr as suggested by the CAG.

The increasing revenue/subscriber-base and decline in the profits have been further accentuated as shown up in the results of the industry leader Bharti Airtel, for the June quarter of 2011; its profit reportedly went down by 28 percent compared to that of the previous year despite an increase in revenue by 38 percent. With three years behind them, the new operators were able to wrest only 6 percent of the market! This was in spite of an increase in the subscribers from 234 m in Dec 2007, prior to the issue of new licenses, to 811 m in March 2011, (and to 850 m by June 2011) Therefore, one may respectfully ask the CAG, in his view, who the real beneficiaries were, of this so-called ‘presumptive’ loss of Rs 176645 cr said to have been caused to the exchequer, by keeping the entry fee at 2001 level, on all the licenses issued in Jan 2008?
· In another computation the CAG has equated the premium obtained on dilution of equity by Swan, Stel and Unitech, to the value of spectrum, on the reasoning that the companies did not have any assets save the license for 2G spectrum then. This ignores the stock market reality. In all growth oriented companies, the market value is several times their book value. The difference cannot be attributed to any particular asset, but the expectation of the investor to make a good return/capital appreciation in the future. Every promoter makes his own contribution to the equity at par value, but charges a huge premium, while diluting the equity, either by way of private placement or by a public issue. For example, Reliance Power raised Rs 10000 cr from the market in Jan 2008, by issuing 10- rupee shares at Rs 450 thereby taking the market capitalization of the company to Rs 100000 cr. At that time it had assets worth only Rs 200 cr and didn’t have a single megawatt of power capacity installed on the ground, but only a grand vision to create 28000 MW-capacity in the future. Similar was the case of RNRL. There are numerous such examples where the promoters sell their ‘visions’ at a hefty premium by diluting the equity, even before acquiring any asset or before commencement of business. The exchequer does not lose or gain from such decisions taken by the investors to buy equity of new or loss making entities at a huge premium or discount. So why should the CAG or anyone else attribute the premium obtained by the telephone companies while diluting their equity to the value of spectrum? If the same rule were to be applied in case of Reliance Power, henceforth the government should be charging an entry fee at the rate of Rs 3.50 crore for issuing permission for putting up every megawatt of power in the country! (Rs 100000 cr divided by 28000 MW). Further, as there is no bar to dilution of equity of companies not having significant assets or not having commenced any business, from issuing shares at a premium, why should the Telcos be discriminated against from doing so?
· By keeping the entry fee low, the exchequer has not been a loser either. By part-sharing of revenue towards the license fee and spectrum charges, the exchequer realized an income of Rs 90000 cr in the last nine years. The service tax of a like amount would be extra. Today license fee, spectrum charges and service tax account for as much as 26 percent of the adjusted gross revenue of the mobile telephone companies.
There is a great deal of disinformation on this issue, arising out of totally unrealistic methods used by the CAG, to invent a loss of Rs 176645 cr to the exchequer, that wasn’t there. This is not to deny the irregularities in the issue of 2G licenses. As many as 85 out of 122 licenses were allegedly allotted to parties who were not eligible according to the criteria set by the DoT. Be that as it may, all one would submit is that there was no loss to the exchequer. It is necessary to change the wrong perception created in the minds of the public by the CAG’s assessment of loss that was flawed.
There is also a suggestion in the CAG’s report that the scarce resources, like the spectrum, should be auctioned in order to ensure transparency in allocation as well as to maximize revenue to the exchequer. But if such a policy was adopted, in areas where the prime objective was to bring in greater social good to the masses, (like, the allotment of low cost tenements, land for residential/industrial purposes, or in the pricing of fertilizer, power, LPG, diesel, tickets for a popular sports event, or even seats in the institutions of higher learning-all of which are scarce), auctioning to the highest bidder would go against the public interest. This writer submits that, increasing the Teledensity in the country and making it affordable to the daily wage earners, fishermen, vegetable vendors, taxi/auto drivers etc., all of whom have been immensely benefitted from the use of mobile phones, is one such laudable cause, where maximization of revenue cannot be the prime objective.

Prior to the implementation of NTP-1999, it was a ‘catch 22’ situation. A high entry fee, payable upfront under NTP-1994, led to high tariff which in turn affected growth; and without ensuring growth in the subscriber base the tariff could not be reduced. The NTP-1999 broke this conundrum by giving remission to the operators from payment of fixed charges since then and instead opted for revenue sharing. This had a beneficial effect of a fall in tariff and an explosive growth in the subscriber-base, complementing each other in a virtuous cycle. The subscribers went up from less than a million in 1999 to 811 million by March 2011 and to 850 m by June 2011. The tariff that was Rs 14 per minute in 1998 came down to 40 paise or even lower, making it one of the lowest in the world! Therefore, the beneficiaries from the so-called loss to the exchequer, by keeping the entry fee low at the 2001 level, have been none other than the 850 million subscribers, whose number is increasing by 10-15 million every month!

4 Comments

“, retrospect charging for spectrum creates uncertainty in a sector ”

There is no retrospect charging as you have mentioned. Charging happens only when the existing allocation expires after their 20-year contracted period. Until their contracts expire, which for some is in 3-4 years time, they are free to enjoy whatever they have got for free.

oracle

May 12, 2010

1. Author
  
  Let me clarify here – what I meant is rules becoming effective retrospect after having given the spectrum at then prevailing conditions. This will be effective immediately [if accepted by DoT] What is not very clear is whether pro-rated pricing will be used – for example Airtel is left with mere 5 years in some license areas where it is holding excess spectrum.
  
  After the existing allocation expires, Government will take back all allocations in 900 MHz [guess they are trying to create a Big Pool].
  
  CP
  
  May 12, 2010
  
In the light of the observations made by the Comptroller and Auditor General of India (CAG), on the humongous loss said to have been incurred by the exchequer and in the absence of an effective rebuttal of the same either from the government sources or from the media, the public are led to believe that the exchequer has lost as much as Rs 176645 crores with a corresponding gain to some unscrupulous operators and the intermediaries. That, some of the operators were able to sell the equity in their companies at a handsome premium tends to give credence to such a notion. This writer has made an in-depth study into this and finds that nothing could be farther from the truth. One may add that, as the entry fee was kept low and unchanged in conformity with a stated policy with a laudable objective i. e, to make available the mobile telephony on demand and at affordable rates to all, to work out the losses in so doing was unwarranted. Further, the methodology adopted by the CAG for arriving at the ‘presumptive’ loss was seriously flawed, which resulted in sensationalizing the losses attributed to the alleged irregularities in the issue of 2G licenses in Jan 2008.
As the CAG is a highly respected, independent, apolitical and constitutional authority, one would say that this huge error of judgment by his office has created, distrust among the people of the country of ability of the government of the day for having incurred such a huge loss, brought down the image of the country as one of the most corrupt nations in the world and the minister concerned charged with a crime that he did not commit. Considering the stature of the institution of the CAG, a criticism of this nature, unless vetted by an equally exalted forum, would lack acceptability both among the people of the country as well as across the political spectrum. With that in view, the author has made a detailed presentation, duly supported by facts and figures to the Public Accounts Committee as well as to the Joint Parliamentary Committee for their consideration. A summary of the same is given below.
At the outset it is not the author’s case that the issue of 2G licenses in Jan 2008 was done in a transparent manner. One respects the CAG’s observations in that regard, as they have been well documented and suggestions for not recurring them in the future stated. But in spite of the irregularities, the fact remains that the exchequer did not suffer any loss. This may surprise many, as to how could there be irregularities sans loss? That requires some explaining.
If someone allocates a product that is scarce to ineligible applicants, the price of which for reasons of public interest was kept well below the market rate, one cannot say that there was loss to the exchequer from such wrongful actions; yet there could be a scam, as the beneficiary who got an out-of-turn allotment, would be willing to pay a handsome kickback to the facilitators. There have been several such cases in the past, in the allotment of land, issue of industrial and import licenses in the olden days, the petrol pump scam etc. The 2G scam could, at worst, be one such thing, as 85 out of 122 licenses were allegedly allotted to ineligible entities.
Look at the following facts:
· The CAG’s main accusation that the Licenses were issued in Jan 2008 at an entry fee discovered six years ago hides the fact that, 51 licenses were issued since then at the same entry fee- 26 of them during Jan-April 2004 when Mr Arun Sourie was the Telecom and IT minister and 2 in June/Sep 2004, 22 in Dec 2006, and one in March 2007, all when Mr Dayanidhi Maran was the minister. So all that Mr A Raja did, since he took over as minister for telecom and IT in May 2007, was to keep the entry fee unchanged, for the licenses to be issued in the latter half of 2007, even though the actual release of licenses spilled over to Jan 2008.

· In the year 2001 when the entry fee of Rs 1658 cr was discovered for a Pan-India license, by a transparent process of bidding, the mobile subscriber base was 3.5 million only. By 2004 this had gone up ten folds to 34 million and by March 2007, 48 times to 165 million. However, no questions were asked as to why the entry fee was not increased in view of the exponential growth that has been taking place since 2001, while issuing those 51 licenses. But when Mr Raja continued with the same policy the CAG has commented as under:

“The bidding pattern of 2001 would clearly indicate that the 2001 price was discovered in a nascent market and considering the revolutionary changes in the Indian telecom market since then, there is no doubt in concluding that the same 2001 price did not reflect the true economic value of a license and the spectrum bundled with it in 2008.” [Emphasis added]

Thus, while the CAG accepts the entry fee having been kept at the same level till March 2007, he thinks it should have been increased ten-folds (explained later) in order to reflect the true economic value of the spectrum in the issue of licenses that took place a few months later! The unfairness of this criticism would be loud and clear.

· There were good reasons as to why Mr Arun Shourie and Mr Maran and later Mr Raja kept the entry fee unchanged. For this, one has to go back to The National Telephone Policy-1994 when the licenses were issued for the first time to the private sector operators, based on a transparent process of bidding. The operators overbid and committed a huge amount payable in annual installments upfront, spread over the license period of twenty years. As the market failed to take off, under heavy the burden of fixed charges they all had committed, the industry became sick. The NTP-1999 addressed this issue and took a bold decision to give remission of all outstanding amounts due (Rs 43000 cr ?) for the balance period of 15 years and allowed the operators to migrate to the new policy based on revenue sharing instead. It is important to note the vision contained in The NTP -1999: To make available telephone on demand to all at affordable rates within a short period, by providing equal opportunities and a level playing field for all operators by creating a competitive environment.
· It is well known that a high entry fee would have a cascading effect on the tariff. It would be naïve to think that tariff would remain unchanged despite a steep increase in the fixed entry fee, irrespective of the manner in which it was discovered, because of the competition. That would be like saying that if the truck prices were increased ten-fold, the passenger fare and freight would remain at the same level because of the prevailing competition within the industry. Therefore, the entry fee was kept low and license fee and spectrum charges were levied as a percentage of Adjusted Gross Revenue. Thus having discovered the entry fee by a transparent process for the first time in 2001 since the implementation of NTP-1999, it would have been unfair to the new entrants, if it were to be increased in the subsequent issue of licenses.
· Before the issue of licenses in Jan 2008, there were already 7 Pan-India operators who got licenses at an entry fee of Rs 1658 cr or lower, for servicing all 23 circles in the country. The purpose of issuing new licenses was to increase the competition, for which a level playing field was necessary. Now if the new entrants were issued licenses at ten times the entry fee paid by the former (at Rs 16750 cr for a Pan-India license, as assumed by the CAG in arriving at the loss of Rs 176645 cr, instead Rs 1658 cr, paid by the rest) how would they be able to compete with the old players, who by then (Dec 2007) had a subscriber-base of 234 million? Thus, the rationale for not increasing the entry fee for 51 licenses issued during 2004 and in the year 2006-07 was equally applicable to the issue of 122 licenses contemplated in the later part of 2007 as well.
· For arriving at the loss of Rs 176645 cr, the CAG has equated 2G spectrum with 3G and compared the price realized at 3G-auction in the year 2010 (Rs 16750 cr for an all India license) with the entry fee of Rs 1658 cr charged for 2G since the year 2001. This was unrealistic as 3G is believed to be faster by 10 to 20 times and can carry 3-4 times the volume of traffic. If 2G was equally efficient as 3G, as assumed by the CAG, the existing 2G operators wouldn’t have been so stupid to pay ten times the fees, for availing the 3G license and wait till 2010 in order to roll out value added services. They might as well have provided those services right from the inception, to their 2G subscribers. In case of Mumbai and Delhi circles, the disparity in prices was still higher -16 to 19 times the entry fee paid for 2G. Yet the CAG has considered 2G to be as valuable for arriving at the ‘presumptive’ loss of Rs 176645 cr!
· If there was a loss to the exchequer by keeping the entry fee low, it is fair to presume that there would have been a corresponding gain to the operators, who got the licenses cheap. This in turn would have shown up in their profits. A reduction in the upfront fee payable by Rs 176645 cr, would translate into a cost advantage of Rs 27000 cr p. a, for the industry as a whole, by way of cost of finance and amortization (both together taken at 15 percent) required to be provided. On the contrary, what one has seen is a decline in the profits of the old operators (or increase in the losses of some) and abysmally low revenue of the new operators as shown in the table below.
Profit and market share of Cellular Service providers with Pan-India license

Service ProviderRs croresMarket share on 31-03-2011
2009-102010-11 *
Sales Net ProfitSales Net Profit
Bharti Airtel35610942638016771720.0%
Idea Cellular1185010541538984511.0%
Reliance Communications 1355547912130-76516.7%
Tata Teleservices 2210-2987359-95111.0%
Total for 4 companies632251066172894684658.7%
Vodafone 16.6%
BSNL/MTNL 12.0%
Aircel 6.8%
Total for 7 pan-India operators94.1%
Total mobile subscribers (Million)811.6
1. * The results for the year 2010-11 are unaudited
2. Vodafone is believed to be highly profitable, but being an unlisted company its results are not available.

The four listed companies stated above had a market share of 59 percent. Yet their combined net profit declined from Rs 10661 cr in FY 2010 to Rs 6846 cr in FY 2011, in spite of an increase in the mobile subscriber base from 584 m in March 2010 to 811 m in March 2011. It is significant to note that both Rcom and Tata Tele remained in the red in FY 2011. The public sector operators BSNL/MTNL are reported to be making huge losses. (MTNL incurred a net loss of Rs 3064 crores in 2009-10. Its unaudited loss for the year 2010-11was reported at Rs 2800 crores). A recent industry survey shows the plight of some of the new entrants whose average revenue per user (ARPU) p. m, for quarter ended March 2011 plummeted to Rs 38 per month and for one an abysmal Rs 8.50! This is indicative of the fact that the industry does not have the capacity to absorb the cost associated with a huge entry fee of Rs 176645 cr as suggested by the CAG.

The increasing revenue/subscriber-base and decline in the profits have been further accentuated as shown up in the results of the industry leader Bharti Airtel, for the June quarter of 2011; its profit reportedly went down by 28 percent compared to that of the previous year despite an increase in revenue by 38 percent. With three years behind them, the new operators were able to wrest only 6 percent of the market! This was in spite of an increase in the subscribers from 234 m in Dec 2007, prior to the issue of new licenses, to 811 m in March 2011, (and to 850 m by June 2011) Therefore, one may respectfully ask the CAG, in his view, who the real beneficiaries were, of this so-called ‘presumptive’ loss of Rs 176645 cr said to have been caused to the exchequer, by keeping the entry fee at 2001 level, on all the licenses issued in Jan 2008?
· In another computation the CAG has equated the premium obtained on dilution of equity by Swan, Stel and Unitech, to the value of spectrum, on the reasoning that the companies did not have any assets save the license for 2G spectrum then. This ignores the stock market reality. In all growth oriented companies, the market value is several times their book value. The difference cannot be attributed to any particular asset, but the expectation of the investor to make a good return/capital appreciation in the future. Every promoter makes his own contribution to the equity at par value, but charges a huge premium, while diluting the equity, either by way of private placement or by a public issue. For example, Reliance Power raised Rs 10000 cr from the market in Jan 2008, by issuing 10- rupee shares at Rs 450 thereby taking the market capitalization of the company to Rs 100000 cr. At that time it had assets worth only Rs 200 cr and didn’t have a single megawatt of power capacity installed on the ground, but only a grand vision to create 28000 MW-capacity in the future. Similar was the case of RNRL. There are numerous such examples where the promoters sell their ‘visions’ at a hefty premium by diluting the equity, even before acquiring any asset or before commencement of business. The exchequer does not lose or gain from such decisions taken by the investors to buy equity of new or loss making entities at a huge premium or discount. So why should the CAG or anyone else attribute the premium obtained by the telephone companies while diluting their equity to the value of spectrum? If the same rule were to be applied in case of Reliance Power, henceforth the government should be charging an entry fee at the rate of Rs 3.50 crore for issuing permission for putting up every megawatt of power in the country! (Rs 100000 cr divided by 28000 MW). Further, as there is no bar to dilution of equity of companies not having significant assets or not having commenced any business, from issuing shares at a premium, why should the Telcos be discriminated against from doing so?
· By keeping the entry fee low, the exchequer has not been a loser either. By part-sharing of revenue towards the license fee and spectrum charges, the exchequer realized an income of Rs 90000 cr in the last nine years. The service tax of a like amount would be extra. Today license fee, spectrum charges and service tax account for as much as 26 percent of the adjusted gross revenue of the mobile telephone companies.
There is a great deal of disinformation on this issue, arising out of totally unrealistic methods used by the CAG, to invent a loss of Rs 176645 cr to the exchequer, that wasn’t there. This is not to deny the irregularities in the issue of 2G licenses. As many as 85 out of 122 licenses were allegedly allotted to parties who were not eligible according to the criteria set by the DoT. Be that as it may, all one would submit is that there was no loss to the exchequer. It is necessary to change the wrong perception created in the minds of the public by the CAG’s assessment of loss that was flawed.
There is also a suggestion in the CAG’s report that the scarce resources, like the spectrum, should be auctioned in order to ensure transparency in allocation as well as to maximize revenue to the exchequer. But if such a policy was adopted, in areas where the prime objective was to bring in greater social good to the masses, (like, the allotment of low cost tenements, land for residential/industrial purposes, or in the pricing of fertilizer, power, LPG, diesel, tickets for a popular sports event, or even seats in the institutions of higher learning-all of which are scarce), auctioning to the highest bidder would go against the public interest. This writer submits that, increasing the Teledensity in the country and making it affordable to the daily wage earners, fishermen, vegetable vendors, taxi/auto drivers etc., all of whom have been immensely benefitted from the use of mobile phones, is one such laudable cause, where maximization of revenue cannot be the prime objective.

Prior to the implementation of NTP-1999, it was a ‘catch 22’ situation. A high entry fee, payable upfront under NTP-1994, led to high tariff which in turn affected growth; and without ensuring growth in the subscriber base the tariff could not be reduced. The NTP-1999 broke this conundrum by giving remission to the operators from payment of fixed charges since then and instead opted for revenue sharing. This had a beneficial effect of a fall in tariff and an explosive growth in the subscriber-base, complementing each other in a virtuous cycle. The subscribers went up from less than a million in 1999 to 811 million by March 2011 and to 850 m by June 2011. The tariff that was Rs 14 per minute in 1998 came down to 40 paise or even lower, making it one of the lowest in the world! Therefore, the beneficiaries from the so-called loss to the exchequer, by keeping the entry fee low at the 2001 level, have been none other than the 850 million subscribers, whose number is increasing by 10-15 million every month!

C S JACOB

September 3, 2011

http://www.rajeev.in/rajeev_writes/2G_Spectrum/MoCITs_Claims_vs_Facts/MoCITs_Claims_vs_Facts-21_January_2011.pdf

Please read the above and offer your comments

B. Sankaranarayanan

September 28, 2011

Comments are closed.

TRAI Links Excess 2G Spectrum Price with 3G Auction Price – Big Mess

Related Articles:

4 Comments