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The ‘2G Scam’

The Supreme Court delivered its highly anticipated decision in the 2G case, marking a watershed moment in the history of Indian telecom law and policy. By directing the cancellation of 122 licences, it brought to conclusion the events surrounding the ‘2G Scam’, which had taken the country by storm over the last several months.

Auctioning of Natural Resources

One of the most crucial portions of the decision relates to the allocation of natural resources, with potential implications for future infrastructure projects linked to power, mining, and development. In this regard, the court observed that:

..while transferring or alienating the natural resources, the State is ‘duty bound’ to adopt the method of auction”.

The Supreme Court made a reference to the National Telecom Policy of 1994 and 1999 (NTP) to highlight the need for efficient utilisation of spectrum, which is an admittedly scarce resource. That apart, the Telecom Regulatory Authority of India (TRAI) had also emphasised the need for ‘efficient utilization of spectrum by all service providers’ and had recommended a ‘Unified Licencing’ or ‘Automatic Authorisation’ regime to replace the existing licencing system.

However, the Supreme Court criticised its recommendations from 2007, whose implementation by the Department of Telecom (DoT) resulted in a gross violation of the NTP’s objectives. Specifically, it found fault with the TRAI’s failure to recommend an auction for allocation of 2G spectrum in the 800, 900, and 1,800 MHz bands, even as it criticised the spectrum allocation criteria and the fact that the licence fee, which was based on 2001 figures, “did not reflect the present value of spectrum”. In arguing against a change to n auction method from the existing system of a one-time license fee, TRAI stressed on the need for a level playing field for operators. An auction, it argued, would disadvantage new licensees, who would have to acquire spectrum and would be unable to compete with incumbent operators who obtained spectrum at original rates by paying a one-time entry fee. But none of these arguments persuaded the Supreme Court.

First Come First Served Policy

In September of 2003, a Group of Ministers (GoM) was constituted by the Prime Minister, and was vested the duty of making detailed recommendations on spectrum policy. However, the GoM authorised the DoT to finalise the details of its implementation, and its recommendations were accepted by the Council of Ministers the following month.

During this period, the Minister of Communication and Information Technology made two important decisions –  the entry fee for new telecom operators was fixed and all new licences were to be issued on a continuous basis under the ‘first come first served’ policy (FCFS Policy). The implementation of the FCFS policy is a crucial component of the controversy  and forms the backbone of the decision holding the minister’s actions to be arbitrary and unfair. It observed that under the FCFS policy,  applications were meant to be processed thirty days, but several applications made in 2004 and 2006 were kept pending for no reason other than a deliberate attempt to favour certain applicants.

The FCFS policy allowed applicants to obtaining sensitive and confidential information from government officials beforehand, giving them a definite advantage over other operators. The Supreme Court found the actions by DoT officials between September 2007 and March 2008, under the leadership of the Minister, to be “wholly arbitrary, capricious and contrary to public interest, apart from being violative of the doctrine of equality”.

Procedural Lapses & Arbitrariness

Meeting with the Telecom Commission: One of the more insidious lapses was that four non-permanent members of the Telecom Commission (including the Finance Secretary) were not informed of the scheduled meeting with the DoT officials, who approved the TRAI recommendations on spectrum allocation by themselves. This is all the more dubious since the Finance Secretary had specifically objected to the suggested licence fee in a letter from 2007. telecom

Deadline for applications: The most striking example of arbitrariness was the advancement of the deadline for submitting applications to the DoT. Initially, the last date for applications was fixed as October 1, 2007, but this was later changed in the most unceremonious manner possible. The DoT subsequently issued a press note stating that it would “issue Letters of Intent to all the eligible applicants who had applied up to 25th September, 2007”. The note reiterated implementation of the FCFS policy, This was followed by another note issued on the same day, asking all applicants to assemble at the DoT headquarters within forty-five minutes to collect the DoT’s responses. Effectively, the DoT had advanced the deadline from 1 October 2007 to 25 September 2007. Even more shockingly, this facts itself was announced on 10 January 2008, much after the original deadline had elapsed, thereby “changing the rules after the game had begun”.

Writ petition in the Delhi High Court: S.Tel, one of the disadvantaged applicants, filed a writ petition in the Delhi High Court. Not surprisingly, it passed an order in favour of S. Tel remarking that the government “cannot be allowed to arbitrarily change the cut-off date and that too without any justifiable reasons.” On appeal, the Division Bench reiterated the arbitrariness of the revised cut-off date after having received all the applications. The court pointed out that “while at the time of making the application there was no such ineligibility, it is introduced later and that too for a select category of applicants”.

Pending applications: Several operators such as Vodafone, Aircel, Tata Teleservices and Idea Cellular had made applications between 2004 and 2006. Under the FCFS policy these applications should have been disposed within thirty days, but were kept pending. By doing so, the DoT had reduced the pool of applicants to whom new licenses could be issued. The Supreme Court noted that this was a deliberate attempt to favour certain operators. It also rejected the argument that too many applications were submitted which required a revision of the cut-off date since the Delhi High Court had earlier found that out of “232 UASL applications received till 25th September, 2007, only 76 applications were received between 25th September and 1st October, 2007. It was only on 1st October, 2007 that 267 applications were made and hence, as of 28th September, 2007, it cannot be said that large number of applications were received”. The Supreme Court observed that this arbitrary action, though innocuous in appearance, was intended to benefit certain ‘real estate companies who did not have any experience in dealing with telecom services and who had made applications only on 24th September, 2007 i.e. one day before the cut-off date fixed’. Out of 122 licenses issued, eighty-five applicants were found to be ineligible, but were granted Letters of Intent.

Prime Minister’s Role: In 2007, the Prime Minister sent a notice asking for a fair and transparent method for the grant of fresh licences. He also suggested a revision of entry fee. However, the Minister of Communication and IT ignored this advice and responded with the usual ‘level playing field’ argument. Towards the end of December, the Minister sent a letter to the Prime Minister, and within twelve days the Prime Minister had approved the FCFS policy. What transpired between November 2 and December 26, 2007 that led the Prime Minister to render his tacit consent to the flawed policy? It is hard to deliberate on the Prime Minister’s culpability without adequate evidence, but his indecisiveness in demanding a fair and equitable spectrum allocation policy, certainly leaves a lot to be desired.

Bypassing the Finance Ministry:  Given the financial implications of allocating spectrum, it would seem logical that the Finance Ministry would be consulted before arriving at a decision. However, the DoT and the Minister dodged all interactions with the Ministry. In November 2007, after the DoT made a presentation before the Cabinet Secretary, the Finance Secretary raised concerns about the licence fee and suggested an ‘in depth examination’ to decide on the revision of rates. But the Minister personally criticised the official, casting aspersions on her competence and knowledge on the subject. The deliberate attempt to silence an honest bureaucratic officer is one of the most tragic outcomes of this episode.

Offloading Stakes: The FCFS policy would be meaningless if certain corporations did not benefit from it financially. It has emerged that three of the successful applicants offloaded their stakes for thousands of crores immediately after the Letters of Intent were issued to them. While it would be premature to say that the companies were involved in the conspiracy, it is hard to ignore the fact that Swan Telecom (floated by DB Reality, whose promoter Shahid Balwa was recently arrested by the CBI) offloaded forty-five percent of its equity in favour of Etisalat, for over INR 3,500 crores. There have also been reports that the DB group transferred approximately INR 200 crore to a media company owned by members of the DMK party, to which the Minister belongs. Besides Swan Telecom, the other companies that offloaded stakes were Unitech (in favour of Telenor) and Tata Tele Services (in favour of NTT Docomo).

Effect of the Decision

The Supreme Court issued the following directions:

  • The licences granted on or after 10 January 2008 (after introduction of the FCFS policy) stand cancelled. The cancellation would be in effect four months from the date of the order. A list of the cancelled licences can be found here.
  • TRAI must make a fresh set of recommendations for the allocation of 2G spectrum.
  • Fresh licenses must be issued through an auction and not through payment of entry fee.
  • Unitech, S-TEL, and Swan were directed to pay INR 5 crores as a penalty, while Loop Telecom, S-Tel, Allianz, and Sistema Shyam were directed to pay INR 50,00,000.

With this ruling, the controversy surrounding the 2G scam has been settled once and for all.  While The Supreme Court has delivered a landmark decision in telecom policy, what really emerges from the evidence on record is that actions of a few wavering government officials can deprive a nation of not only its scarce resources, but also crores of rupees that could have been channeled into useful developmental projects.

(Image from Glyn Baker under a Creative Commons license)

This was originally published on myLaw.net

About Amlan Mohanty

Amlan is a lawyer based in India. He has been writing about technology and intellectual property for the last five years.