SC Judgement Shows India Ready To Battle Crony Capitalism

The telecom sector through its entire history, spanning the last decade and a half, has seen many dubious policy and administrative decisions, and consequently, many ups and downs. However, through this whole period, there has been never a moment like 2^ndFebruary 2012.  Because for the first time ever, the Supreme Court with its judgement has signalled that the days of illegalities and dubious decisions in Telecom are over.

That is precisely why this judgement is a landmark judgment. In a nutshell, all the scams and corruption that have plagued the telecom sector and investors - that have its roots in a dysfunctional and ineffective regulator, TRAI and an out-of-control Department of Telecommunication bureaucracy - are taken head on in this judgement. This judgment signals that the sector is finally only open to those investors and stakeholders who wish to invest, build and succeed by following the laid down rules and laws.

For starters, the Supreme court has determined that the process used to issue 122 cellular licenses were in violation of laws, including the TRAI Act, and therefore, agreed with the petitioner that such licenses were illegal and should be cancelled, spectrum be taken back and re-auctioned within a four month period after recommendations are received from the TRAI. The spectrum in question is approximately 530 MHz or an average of 24 MHz per circle (some of it is still with the government).

This is the first time that there has been such a detailed judicial scrutiny of the license issuing process. This scrutiny and the judgment establishes the unambiguous basis for the governments today and in future for licenses – i.e., auctions or market-based mechanism. This should have been a common sense solution for those in charge of public policy formulation in Government, and in absence of such common sense, the Courts have stepped in.

Looking ahead, this judgment clarifies many policy confusions sought to be created and also lays down the mammoth task of cleaning up and reorganizing the sector over the next year or so. First, all spectrum in future will have to be auctioned. The excuse about public interest to circumvent auctions is no longer acceptable. Affordable tariffs will have to be guaranteed through vibrant competition and an alert regulator. Second, ministers trying to work with legal opinions - without the consent of the Cabinet and in violation of the Transaction of Business Rules 1961 - are liable for serious indictment as the CAG becomes active and the citizenry becomes enlightened on corruption issues. Finally, all scarce national resources have significant commercial value and any attempt to give it away without market pricing results in a loss to the exchequer.

The auction design and timing will both be crucial to ensuring government revenues. The government needs to carefully think through how much spectrum to auction to each entity. Should it be 5 MHz to attract five new bidders or should it be 5 MHz for existing operators into three slots and perhaps two new slots of 10 MHz each, where only new bidders are allowed to bid so as to keep the level of competition robust?

The TRAI, which has been at the receiving end of massive criticism in this judgment, needs to be rebuilt. Its credibility around its Independence and also its regulatory capacity has been seriously questioned. I have repeatedly drawn attention to the almost total capitulation of the TRAI at various stages to political pressure, and worse still, its track record of compromised and questionable regulations and recommendations starting with the infamous October 2003 recommendations that first bypassed bidding. The TRAI needs rebuilding – its recommendations need to be direct, clear and less convoluted. It needs to intervene when DoT doesn’t follow its recommendations or violates the TRAI Act in terms of the process.

The rebidding of these licenses has to be carefully planned by the TRAI and is an opportunity for it to redeem itself. TRAI needs to work independently and take sufficient time to give out recommendations that follow detailed consultations with crucial pieces such as reserve price based on a defendable benchmark, a timing that allows for serious global bidding, competition model that ensures that big private companies do not consolidate market power in current context, and spectrum slots that allow for both voice and data to blossom, rather than fragment it in the manner that DoT attempted in recent times.

When should the bidding occur? In my opinion, four months is way too soon. The government needs to approach the court to seek additional time. A proper global bid can only occur if sufficient time is given to global investors to form joint ventures, have in front of them a M&A policy (through which they can acquire subscribers), and then invite bids. This will ensure a proper market price. Instead, if this spectrum is re-bid amongst existing operators, who will pay nothing more than the bare minimum benchmark price, it will totally distort the competitive landscape which is the only sustainable way to ensure affordability for consumers.

Before this occurs, the government will need to plan how to handle demands of some of the companies that have become unintended victims of this scam. Those who have been accused of corruption or have sold spectrum at significant values will probably find it difficult to get license fees back from the government. Others may be able to get some refunds. Then there is the question of refunding their infrastructure costs. It would seem that the government will need to refund between Rs. 7,000 to Rs. 15,000 crores (infrastructure costs included) to start the bidding process in which they could recover a lot more. Unless this settlement occurs in a transparent manner, it would either reek of a scam or lead to massive litigation where such companies could sue the government for damages.

In essence, the government needs to take measured and deliberate steps at this stage.

The task from here onwards is mammoth, requires great character, transparency, and above all, a divorce from unnecessary political posturing and spin. Going forward, this is the opportunity to put this inglorious chapter in the history of Telecom and our country behind us and move ahead in a far more robust way on the back of some real policy action on part of the Political leadership.

If we find the right people who have these characteristics but also a deep understanding of the sector and economics, there may be light at the end of the tunnel. India is at a very unusual stage. It cannot borrow from any international precedents; it will have to charter its own way. Unfortunately, because of the recent scams and the tolerance of these illegal actions by the Government and the Cabinet, we are not just at crossroads, but at a road less traveled.

This landmark judgment of the Supreme Court gives out a clear signal that India is getting ready to battle crony capitalism alongside the anti-corruption movement. Equally that regardless of political status or financial muscle, the law will catch up with you. I hope the political leadership sees this as a start of the process of reconstruction in a sector where both investor confidence and public policy objectives have been hit hard since 2008.

Rajeev Chandrasekhar

Member of Parliament

Member – Standing Committee on Information Technology

rajeev.c@nic.in

This article appeared in Business Standard on 05^th February, 2011