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Editor: Nagaraja.M.R.. Vol.16.....Issue.56..............31/05/2020
PIL - Reliance Group Scams
https://sites.google.com/site/sosevoiceforjustice/pil---reliance-scams
License to Reliance Jio Illegal?
A Call for Review: Supreme Court’s Decision on Reliance Jio Perspectives
Paranjoy Guha Thakurta
The Supreme Court has ignored evidence of apparent forgery and auction-rigging while dismissing a petition seeking to quash the government's decision permitting Reliance Jio to provide voice telephone services over fourth-generation spectrum. The company, headed by India's richest man, has also failed to meet its roll-out obligations. The apex court should review its decision.
The writer acknowledges research and writing assistance by Abir Dasgupta, Honi Joshi, Natasha Bhide and Mugdha Kinjawadekar.
The 8 April decision of the Supreme Court to dismiss a petition (Business Today 2016) questioning the manner in which Reliance Jio (RJio) obtained a licence to provide a range of mobile voice services ignores evidence relating to criminal forgery of a bank document and rigging of auction procedures (Centre for Public Interest Litigation v Union of India 2016). The country’s highest court also chose not to take into account the failure of the company, headed by India’s richest man Mukesh Ambani and which has reportedly invested a huge ₹1,50,000 crore in this venture, to adhere to contractual obligations relating to rolling out its services (DNA 2016). The verdict by a three-judge bench comprising Chief Justice T S Thakur and Justices A K Sikri and R Banumathi needs review given the information that is now available in the public domain.
A public interest litigation (PIL) petition filed by lawyer and activist Prashant Bhushan in May 2014 had argued that a kind of spectrum called broadband wireless access spectrum was acquired by RJio in 2010 using questionable means, by allegedly rigging the auction for it and by using a front company. The petition also argued that RJio had acquired a licence in March 2013 to offer voice telephony using the spectrum it had won in the 2010 auction without paying the amount it should have. Bhushan also requested an order from the Supreme Court directing the Department of Telecommunications (DOT), which is under the Ministry of Communications and Information Technology, to levy on RJio spectrum usage charges (SUC) at par with other operators providing voice telephony. Finally, the petition also sought a court monitored investigation into the decision of the government to grant the licence to RJio.
Incidentally, a draft report of the Comptroller and Auditor General (CAG) of India, a constitutional authority mandated to oversee public finances, had found that a so-called front company, Infotel Broadband Services Private Limited (IBSPL), that had won the spectrum in the auction and which had subsequently been acquired by RJio, had used a forged document, a bank guarantee given by Axis Bank (BGR 2014; Majumdar 2014; Guha Thakurta 2016a). That is a criminal offence. However, the Supreme Court did not consider this as evidence of the auction being rigged and stated that it was “unnecessary to delve into” the subject as the bench felt that the auction of spectrum was not the subject matter of the dispute and was never questioned by anybody.
The Supreme Court bench disregarded CAG’s claims that the amount paid by RJio for its licence was much lower than what it should have been and declared that the grant of the licence was valid and legal. The Court held that CAG committed an error in forming its opinion though the bench heard neither the CAG nor the Director General of Audit (Post and Telecommunication) who prepared the draft audit report. On the issue of the company paying a lower SUC leading to loss of revenue to the exchequer, the Court chose not to act and instead left the matter to the government (in this case, the DOT).
The Background
Mobile phones communicate with one another by using electromagnetic waves of radio frequencies (RF) that lie in the range of 3 kHz (kilohertz) to 300 GHz (gigahertz). Mobile service providers (MSPs), such as Bharti Airtel and Vodafone, build and maintain networks through which these electromagnetic waves travel. To do this, they are allocated specific blocks of frequencies (ranging in size from 5 MHz (megahertz) to 20 MHz typically) in the RF range by the government (that is, the DoT) within which they are permitted to operate. This allocation of spectrum takes place by means of a public auction where competing MSPs bid for the rights to control frequency blocks. Batches of spectrum, that is, previously unallocated frequency ranges (as and when these become available) are periodically auctioned by the DOT which sets rules and conditions for the use of spectrum.
The country is divided into 22 administrative areas known as “telecom circles” or “service areas.” These include circles in three metropolitan areas—Delhi, Mumbai and Kolkata—besides larger states (that are circles on their own) and groups of small states clubbed together into single circles. The spectrum blocks that are sold to MSPs are sold separately for each circle. For a company to provide pan-India services, it needs to buy spectrum blocks in each of the 22 circles.
On 25 February 2010, the DoT announced an auction of spectrum for MSPs to provide services using third and fourth generation (3G and 4G) technologies. The notice inviting applications (NIA) which announced the auction offered three or four blocks in each circle (depending on availability) for 3G services and two blocks in each circle for 4G services for MSPs to bid on. The 3G blocks were in the 2.1 MHz band and the 4G blocks were in the 2.3 MHz band of spectrum. The 3G blocks came in the form of two units of 5 MHz in each block, one unit for the “uplink” (the connection from a phone to a server) and the other unit for the “downlink” (the reverse connection from a server to a phone). The deployment of 3G technology demanded this kind of separation of the frequencies used for connections in opposite directions. The 3G blocks were priced at a “reserve price,” a minimum price that the government had determined, of ₹3,500 crore. The 4G blocks came in the form of single units of unpaired 20 MHz in each block, since 4G technology permits connections in both directions to take place in the same frequency range. The reserve price for each of the 4G blocks was ₹1,750 crore.
The NIA specified the criteria that would make a company eligible to participate in the auction. At that time, telecom companies operating in India could get three kinds of licences, each permitting a different kind of activity. A Cellular Mobile Telephone Services (CMTS) licence permitted a company to offer voice calls—the usual variety of mobile phone calls and text messaging. An internet service provider (ISP) licence permitted a company to provide internet services, both wireless and through fixed lines. A Unified Access Services (UAS) licence combined the possibilities of the CMTS/ISP licences, permitting the company to offer both voice calls as well as internet services. Under the terms of the NIA, a company holding any of these three kinds of licences could participate in the auction. Companies that did not hold any of these licences but committed themselves to obtain the necessary licences after the auction could also participate. Even foreign companies that were willing to incorporate Indian subsidiaries after the auction were allowed to participate.
The NIA also specified what the spectrum that was being sold could be used for. The 3G spectrum could be used for any purpose—voice calls or internet (mobile data)/videos. The 4G spectrum of a type known as broadband wireless access (BWA) could only be used for providing mobile data/videos.
The BWA/4G auction took place in May–June 2010. With virtually every Indian ISP being permitted to bid, a small and unheard-of company called IBSPL turned out to be the big winner of the 4G auction, successfully bidding for one block in each of the 22 telecom circles. For this, it bid a total amount of ₹12,847.44 crore. The remaining blocks were shared between five Indian/foreign companies—Bharti Airtel (four circles), Aircel (eight circles), Qualcomm (four circles), Tikona (five circles) and Augere (one circle). Immediately after the auction, IBSPL was sold to Reliance, and three years later it was renamed Reliance Jio Infocomm Limited. Evidence in the public domain suggested that IBSPL had apparently forged a crucial bank document to participate in the auction, that the BWA/4G auction was allegedly rigged, and that IBSPL acted as a front company for Reliance Industries Limited, the single biggest private corporate entity in the country.
What Was IBSPL?
IBSPL, incorporated in February 2007 and granted a pan-India ISP licence in November 2007, was ranked 150th in the list of ISPs by the Telecom Regulatory Authority of India (TRAI) at the time of the auction. It had a paid-up capital—the amount of the company’s capital that had been funded by its shareholders—of ₹2.51 crore, a net worth of ₹2.49 crore, and just a single leased line client from which it earned ₹14.78 lakh. It had no more than ₹18 lakh in the bank, of which ₹11 lakh had been paid to banks for a “bank guarantee”—a security of sorts—that it had deposited with the DoT for the grant of its ISP licence (Guha Thakurta 2015; Guha Thakurta and Ghatak 2016).
The company that promoted IBSPL, Infotel Digicom Private Limited (IDPL), had an equity capital of ₹6 lakh and a net worth of ₹8.55 lakh at the end of the financial year 2008–09. IDPL held no fixed assets and earned revenue of ₹2.59 crore primarily in the form of “other income” and made a net profit of ₹42.80 lakh in 2009–10. According to IDPL’s audited accounts, it gave 100% margin money in the form of a fixed deposit of ₹25 lakh as security against issuance of a bank guarantee for ₹25 lakh as of 31 March 2010 (Guha Thakurta and Ghatak 2016).
IDPL was promoted by Anant Nahata—the son of Mahendra Nahata, who is the promotor of Himachal Futuristic Communications Limited (HFCL), a manufacturer of telecom products and provider of telecom services. HFCL had first been noticed in 1995 when it had bid a staggering sum of ₹85,000 crore to provide second generation (2G) mobile services in nine circles. At the time, it had failed to deposit the amount. Interestingly, HFCL also came in the limelight in 2011 when it was alleged that Datacom, a company owned jointly by Videocon and HFCL had been one of the prime beneficiaries of what has come to be known as the 2G scam—the allotment of 2G spectrum during the period when the Dravida Munnetra Kazhagam’s Andimuthu Raja was the union communications minister (Guha Thakurta 2015)
Forgery in Bank Guarantee?
To participate in the auction, the DoT needed all aspiring companies to deposit a sum of money known as an “earnest money deposit” to demonstrate their commitment to bidding in the auction. This amount was set at ₹252.5 crore for pan-India spectrum. Despite its lack of financial muscle, IBSPL was able to furnish the required amount. It did so in the form of a bank guarantee from Axis Bank of the same amount (Jain 2015).
A draft report of the CAG which leaked to the media in July 2014 had examined the bank guarantee that IBSPL had submitted and found that it seemed to have been tampered with (see scanned extracts from draft report and the copy of the bank guarantee). The name of the beneficiary—that is, IBSPL—had been written by hand in ink on the body of the bank guarantee document after erasing the name of the actual beneficiary that was written earlier. This could have attracted criminal prosecution. The draft report also pointed out that no disclosure had been made of any margin money paid for the bank guarantee in IBSPL’s accounts for 2008–09 and 2009–10. All the evidence pointed to the bank guarantee having been facilitated by another company, a fact that IBSPL failed to disclose. This detail was omitted from the final version of the CAG report (2015) that was tabled in Parliament on 8 May 2015 (Guha Thakurta 2015).
Scanned Extracts from Draft CAG Report
Rigged Auction
This questionable bank guarantee was sufficient for IBSPL, a tiny ISP, to participate in the auction. And it thoroughly dominated the final auction. The auction was conducted electronically over 16 days beginning 24 May 2010, and at the end IBSPL acquired 20 MHz BWA spectrum for all 22 telecom circles in India at a final price of ₹12,847.44 crore, 5,000 times its net worth. Major players such as Anil Ambani’s Reliance Communications, Tata Communications (both participating in the auction through sponsored subsidiaries), Vodafone Essar and Idea had all dropped out of the auction midway apparently due to the high prices (Guha Thakurta 2015).
IBSPL, with its negligible net worth, was allowed to proceed by the government even as the bid amounts rose. There was no intervention to investigate or to stop the auction by either the auctioneer or DoT or an inter-ministerial committee (IMC), comprising officials from other government departments such as the Departments of Industrial Policy and Promotion, Information Technology, and Economic Affairs in the Ministry of Finance, which had been set up to monitor the auctions (Guha Thakurta 2015).
The BWA/4G auction ended on 11 June 2010 after 117 rounds of bidding. The provisional results recommended by the IMC were to be approved by a committee of secretaries to the Government of India headed by the cabinet secretary and including the finance secretary, the secretary to the now-defunct Planning Commission and the secretary of the DoT. The provisional results were declared, however, on the afternoon of 11 June with the approval of the IMC, indicating IBSPL as the winner. The final CAG report detailed how when the committee of secretaries met on 12 June to consider the IMC’s recommendations for approval of the provisional results, it was informed that the “auctioneer was satisfied with the conduct of the auction process.” The IMC reiterated that “the electronic auction system was not compromised from both security and competition aspects and there was no indication of any collusive and coordinated bidding” (Guha Thakurta 2015).
An independent analysis of the 3G and BWA auction which is available with this author revealed the highly aggressive bidding behaviour of IBSPL which should have raised multiple red flags with the IMC. Figure 1 (p 35) depicts the 3G auction in which IBSPL did not take part and the blocks up for grabs were shared between companies that had made full disclosures and is representative of a fair and transparently conducted auction.
Figure 1: Service Areas Won in the 3G Auction
Here, Reliance Communications, Bharti Airtel, Aircel and Idea bid on blocks in all the service areas and each won a certain share. When the bids for the blocks won are scrutinised, it reveals that each company focused on specific areas where it could reasonably expect market conditions to be such that introducing 3G services made financial sense. This is also reflected in the eligibility points that each company held over the course of the auction.
Eligibility points are a mechanism for monitoring the bids of different parties in an auction. Each starts off with a certain number which determines how many blocks it is eligible to bid for. As bids are made over several rounds of the auction, the bidders begin to lose eligibility points if they do not bid for all the possible blocks. The auction procedures require that a certain level of eligibility points be maintained in the early stages of the auction, after which companies can focus on the blocks they intend to win. As their focus on certain areas increased, their bidding for other areas dropped off and thus their eligibility points also dropped. This aspect is depicted in Figure 2 (p 36).
Figure 2: Eligibility Points of the Bidders in the 3G Auction
4G/BWA Spectrum Auction
Despite its low net worth, IBSPL was the only company which bid the reserve price of ₹ 1,750 crore for each and every service area in the first round of bidding on the first day of the BWA auction. It was the provisional winner, ranked first, in almost every round of bidding in all service areas. Despite being the smallest of the eight bidders which started the auction with 350 eligibility points in the first round, it was the only bidder that ended with all 350 points in the final round. It even surpassed the bidding requirements specified by the auctioneer, maintaining 100% bidding activity across all rounds surpassing the required 80–90% prescribed for the first 81 rounds. It was the only bidder that raised a bid or maintained the bid of the previous round in 2,564 rounds (99.61%) of the 2,584 rounds of the auction. Its closest competitor, Aircel, by way of contrast, bid only during 607 rounds (24%), followed by Bharti Airtel (579 rounds) and Qualcomm (538 rounds). IBSPL was ranked second only in one round, and did not bid in eight. The daily bids are summarised in Table 1 (p 37). At the end, IBSPL ended up winning blocks in every service area (Figure 3, p 36).
Figure 3: Service Areas Won in the BWA/4G Auction
Tellingly, whereas larger bidders like Bharti Airtel, Aircel and Qualcomm concentrated their bids largely in Category ‘A’ service areas in the large metropolitan cities, keeping in mind higher per capita incomes, higher literacy rates and other factors that indicated the likelihood of the area being a good market for 4G data services, IBSPL bid equally without discrimination on all categories of service areas including Categories ‘B’ and ‘C’ areas which were semi-urban and rural areas with much lower smartphone ownership and internet penetration. These reflect in the trend of eligibility points that each company held as the bidding proceeded (Figure 4, p 38).
Figure 4: Eligibility Points for Bidders in the BWA/4G Auction
For a company like IBSPL with no apparent known sources of finance, these astronomical bids showed clearly that it had some kind of financial backing that it had not declared. The IMC was supposedly monitoring the auction and producing a daily report. How a small company was able to bid huge amounts unnoticed is a mystery that the auctioneers and members of the IMC must uncloak.
On 11 June 2010, while the day’s auction ended in the forenoon, IBSPL called an extraordinary general meeting of its shareholders at short notice, where it raised its authorised share capital 2,000 times, from ₹3 crore to ₹6,000 crore, by issuing 75% of its shares to Reliance Industries Limited (RIL), a listed company and India’s single biggest private corporate entity, making itself a subsidiary of the latter. These events took place in full public view. On 10 June, a front-page report in the Economic Times mentioned that IBSPL could be taken over by RIL, with all-India 4G spectrum prices touching ₹12,257 crore (Guha Thakurta and Ghatak 2016). The draft CAG report found that this disclosure had an immediate impact on the auction process as Bharti Airtel, which was fiercely competing with IBSPL and Qualcomm for blocks in the Delhi and Mumbai metropolitan circles, withdrew from the auction within hours.
The draft CAG report noted that Anant Nahata had confirmed on television on 11 June that talks were on with the Reliance group since the start of the BWA auction. Six days later, on 17 June IBSPL authorised its board of directors to allot 4.75 billion equity shares of ₹10 each to RIL and 250 million shares to IDPL, totaling ₹5,000 crore. RIL now owned 95% of the company with 5% held by IDPL. On 19 June, IBSPL ceased to be a private limited company and became a public limited company. All this was done before IBSPL’s memorandum of association—a document that governs the relationship of the company with external entities—was altered and the increase in its authorised share capital recorded by the Registrar of Companies in the Ministry of Corporate Affairs. On 22 June 2010, IBSPL paid the staggering bid amount. On 22 January 2013, it was renamed Reliance Jio Infocomm Limited. Mahendra Nahata was made a director in RJio (Guha Thakurta 2015).
The draft CAG report had some sharp observations to make. It noted that IBSPL had not declared its relationship with RIL as an associate or partner in its application for participating in the auction for 4G spectrum when details of all applications were disclosed on the website of the DoT on 6 April 2010. This non-disclosure, the CAG argued, deprived IBSPL’s competitors of their right to know about the financial status of all bidders in the auction and violated the transparency and sanctity of the auction. The CAG report held that IBSPL violated the confidentiality clause of the auction rules by leaking the information of their continued participation in the auction on the 15th day of the auction to the media. Further, the draft report indicted the DoT as “[having] failed to recognise the tell-tale sign[s] of rigging of the auction right from [the] beginning of the auction” in which a small ISP emerged as the winner by bidding 5,000 times of its net worth. It recommended that “[t]he government should get the matter investigated even at this juncture, fix responsibilities on the bidders which violated the auction conditions/rules prescribed and cancel the allotment of the BWA spectrum along with exemplary punishment on the colluding firms.” None of these observations of the CAG found their way to its final report (Guha Thakurta 2015).
From 4G Broadband to Voice Services
In 2011, after the auction, IBSPL, now owned by RIL, applied to DoT for a “mobile country code” and a “mobile network code” that would enable it to set up a “public land mobile network.” This would permit it to provide landline and mobile voice services (Guha Thakurta 2016b).
The DoT had considered the issue first in July 2008. It had then held that in case prospective BWA spectrum holders applied to the government to acquire licences permitting them to provide voice services in addition to data services, their request may be considered if they paid the same price that the successful bidder in the 3G auction paid. They clarified again in 2010 that voice services were only permitted using 2G and 3G spectrum (Guha Thakurta 2016b). The TRAI had recommended that while 3G spectrum was meant for both voice calls as well as data services, 4G spectrum, or BWA spectrum, was meant for faster diffusion of broadband and data services only. These were the conditions that were known to the bidders at the time of the auction, and their bids were prepared accordingly (Guha Thakurta 2016b).
So when IBSPL/Reliance said that it wanted the BWA spectrum to provide data services on a technological platform called long-term evolution or LTE, a 4G technology that was developed by the Third Generation Partnership Project (3GPP), a global industry trade group, this was objected to by the technical wing of the DoT, the Telecommunication Engineering Centre in March 2012, on the grounds that “the capabilities of LTE technology are much wider in scope than what is permitted in the ISP license and since LTE is a technology which can be used for providing full-fledged mobile services along with high speed data services, it is possible for an ISP licensee to use LTE for both internet services as well as full-fledged mobile services.” It reminded the DoT that “currently full mobile services are provided under UAS license only” and recommended that the issue needed further examination (qtd in Guha Thakurta 2015).
Thereafter, various committees were set up to examine the issue. In April 2012, at the request of the DoT, the TRAI furnished guidelines on changing the licensing framework and replacing it with a new unified licence (UL) regime, which would facilitate the migration of internet service providers into full service operators offering voice services. The TRAI guidelines were deliberated upon by a DoT committee and subsequently by the Telecom Commission (Guha Thakurta 2016b).
In August 2012, another DoT committee held that spectrum sold in 2010 was not a “liberalised” spectrum—wherein the terms of the licence do not require that the frequencies be used for a specific service or technology—and argued that had the spectrum blocks been specified and declared as liberalised spectrum blocks in the NIA, the bidders would have taken “informed” decisions while placing bids during the auction and the “market discovered price” might well have been different. In earlier telecom regimes, the DoT would specify the purpose for which spectrum could be used, for instance, voice or data or both, etc (Guha Thakurta 2016b).
Essentially, the committee was arguing that had it been known that those using 4G/BWA spectrum would be allowed to provide voice services, the bidders would have bid for spectrum based on a different set of commercial criteria. In essence, all bidders would have known in advance that the 4G/BWA spectrum could be used for both data and voice, and not data alone, and the playing field would have been level (Guha Thakurta 2016b).
In September 2012, the Telecom Commission decided that, given the complexities of the UL regime, further analysis and deliberations were required. It was felt that there were serious implications in implementing the TRAI’s recommendations on the UL regime for new entrants as well as for existing licensees providing various services. Yet another committee of the DoT was constituted in September 2012 to examine the issue and suggest the way forward. Till January 2013, this committee failed to decide on this issue. On 25 January 2013, this committee was expanded by including all the full-time members of the Telecom Commission, including the secretary of the DOT, and other technocrats (Guha Thakurta 2016b).
In February 2013, this committee approved the conversion of ISP licences to the new UL. Reliance Jio (as IBSPL had been renamed by then) was the first to take advantage of this decision. The company paid an “entry fee” of ₹15 crore and a “migration fee” of ₹1,658 crore in August 2013 and was granted a UL on 21 October 2013, formally authorising it to provide voice services (Guha Thakurta 2016b).
According to the CAG, the fee of ₹1,658 crore was decided upon in 2001 and this price did not reflect the “present value” of the spectrum in August 2013. Taking into account the rate of inflation between 2001 and 2013, the value of the licence would have been, the report estimated, at least ₹5,025 crore. This meant that RJio got an “undue advantage” of ₹3,367.29 crore since the price at which Reliance migrated did not factor in changes in the value of the spectrum over a period of 12 years (Guha Thakurta 2015).
During the 2010 auctions, the UAS/CMTS licensees had paid ₹1,658 crore as an entry fee, while the ISP licensees had paid only ₹30 lakh. Between 2001, when the price had been decided upon, and 2013, when Reliance paid the entry fee, the market conditions had changed drastically. But the price was not modified to reflect the present value. DoT’s permission had allowed ISP licensees holding 20 MHz BWA spectrum to offer pan-India voice services by paying the incremental entry fee of ₹1,658 crore, a fraction of the market price of the same quantity of 3G/2G spectrum.
According to the draft CAG report, the difference between the proportionate prices would have amounted to ₹20,653 crore on the basis of the 2010 auction price. Add to that the net present value of the entry fee for UAS licensees at the end of financial year 2009–10, that is (₹3,847 crore minus ₹1,658 crore), and the figure would increase to ₹22,842 crore. Thus, the alleged “undue benefits” were calculated to be ₹22,842 crore. The final report of the CAG presented in Parliament on 8 May 2015 omitted any reference to the above calculation but it reiterated that loopholes were never plugged by the DoT. When the deputy CAG Suman Saxena was asked about the changes at a press conference following the tabling of the report, she refused to provide a clear answer, merely stating “a draft is a draft” (Guha Thakurta 2016b).
Interestingly the issue of a unified licence was first considered by the TRAI in October 2003. UAS licences had been issued in November 2003 on migration of/from existing CMTS licences. UAS operators were free to provide, within their area of operation, services which cover collection, carriage, transmission and delivery of voice and/or non-voice messages over the licensee’s network by deploying circuit and/or packet switched equipment. It had been recommended by the TRAI in January 2005 that all existing licensees should migrate to UL in the next six months. However, these recommendations were not accepted and acted upon.
In the last three years, Reliance Jio has been the only 4G spectrum holding ISP which has voluntarily opted for migration to the UL regime. No other BWA spectrum holding ISP migrated to the UL, as per the list of UL licensees available on the DoT website as on 18 March 2016. Other telecom operators opted for the UL only when it was made compulsory.
Roll-out Obligations
Every MSP has to pay a fee known as SUC annually, over and above spectrum auction fee, to the government for the spectrum they utilise to provide their services. These are calculated as a percentage of the company’s adjusted gross revenue (AGR). The AGR is the total revenue received after any allowed deductions or allowances. In its final report, the CAG had alluded to the liberal roll-out obligations of five years that had been a part of the NIA. Under its terms, the winner of the BWA spectrum had to ensure that at least half the rural short distance charging areas (these are units that the large telecom circles are further divided into) had to be covered within five years of the effective date of grant of the spectrum. Coverage of an area would mean at least 90% of the area would get the required street level coverage. To incentivise the roll-out in rural areas, the SUC for use of BWA spectrum were kept low. However, the TRAI also felt in 2008 that if annual fees for BWA spectrum were lower than the slabs defined for the cellular telephony spectrum, it would open the possibility of arbitrage. This was a concern because using BWA technologies, cellular operators could offer VoIP (Voice over Internet Protocol) services on a mobile platform and pay less in spectrum use fees. It would then be difficult to segregate the subscribers making the collection of fees on cellular telephony even more complicated than it already is.
Keeping these concerns in mind, TRAI had also felt that the BWA operators should pay the same AGR share as the cellular operators. In order to lessen the burden on rural subscribers TRAI however recommended that the DoT should not charge an annual spectrum fee for the first year of operation of the BWA network. After this one year, it recommended charging an annual fee of 1% of AGR, which was to be added to the applicable slot of spectrum fees that the operator was already paying. The DoT accepted the recommendations of the TRAI and laid them down in the NIA.
The CAG noted in its final report that despite the liberal roll-out obligations of five years, the 4G spectrum remained largely unutilised with hardly any significant roll-out of services since the allotment of spectrum in 2010. “The liberal roll-out obligations have not been achieved by any of the six winners even after four years since the award of the spectrum,” it pointed out. “BWA services have been started only in a few select cities by only one operator. BWA services have not been rolled out in rural areas which was one of the prime objectives of the auction.”
With RJio being granted permission to provide voice services over the BWA network, it was effectively put in a position of advantage over other providers of voice services who pay SUC at 5–8% depending on the quantum of spectrum held. The final CAG report pointed out this discrepancy and noted that this combined with the failure in roll-out led to a “lack of efficient use of spectrum, hoarding of spectrum in view of absence of roll out of BWA services and non-realisation of the expected revenue share in the form of SUC even after more than four years of allocation.” The TRAI had, in subsequent recommendations in September 2013, suggested making the SUC rates uniform for all UL holders irrespective of which spectrum band they used. It suggested the rate be fixed at 3% for BWA spectrum where services are being provided under the CMTS/UASL/UL regimes. However, this suggestion was not accepted.
Supreme Court Verdict
The observations about the rigging of the auction and the irregularities in the bidding process failed to attract the attention of the Supreme Court, just as they had disappeared from the final CAG report. Nor was the auction challenged by any of the competing companies at the level of the TRAI or the DoT. In its judgment, the Court stated:
We may like to add here itself that the auction of BWA in which IBSPL turned out to be a successful bidder resulting into the acquisition of pan India BWA spectrum in its favour is not the subject matter of dispute and was never questioned by anybody….
Further, as already noted in the earlier part of this judgment, though 11 bidders had participated, none of the other bidders make [sic] any complaint about the fairness, transparency and as well about the process of bidding (Centre for Public Interest Litigation v Union of India 2016).
In light of the observations made in the CAG’s draft report, this position appears to be open to challenge. In the final CAG report, it was pointed out that the violation of the confidentiality clause of the auction rules would have necessitated cancellation of the allocation of spectrum. As per paragraph 4.1.1 of the NIA on “confidentiality,” bidders and insiders were prohibited from conveying any confidential information to any other person, including any other bidder or its insiders. They were also not permitted to disclose the status of their participation, including whether they continue to bid on any or all service areas, in any of the auctions, until the auction was completed.
The Economic Times report on the 15th day of the auction (10 June 2010) clearly violated this condition. Its report had an immediate impact, with Bharti Airtel which had been competing for the Delhi and Mumbai circles since start of the auction withdrawing from the bidding for these circles on 10 June within hours of the publication of the story. The non-disclosure of its partnership with RIL should have also disqualified IBSPL’s bid. As per paragraph 4.2.1 of the NIA, applicants were required to inform the DoT promptly in case of any change in information submitted by them as part of their application. The DoT was only informed of the sale of the 95% of IBSPL shares to RIL on 22 June 2010, well after the auction ended.
Having swiftly disposed of the possibility of serious discrepancies in the auction process itself, the first issue that the Supreme Court turned its attention to was the change in licence which permitted voice telephony to be provided in addition to data services over the 4G spectrum. In his PIL, Bhushan had asked the Court to quash the 2013 order of the DoT, arguing that it constituted a “back-door entry” for RJio into obtaining a unified licence. He argued that an undue financial benefit had been passed on to RJio by this mechanism. He had brought to the Court’s attention the calculations in the draft CAG report. He had also alleged irregularities in the formation of the final DoT committee that issued the order, saying that the secretary of the DOT, under whose chairmanship the committee operated was due to retire in two months. He alleged further that the representative of the finance ministry who attended the meeting of the Telecom Commission that approved the recommendations of the DoT committee ignored the finance ministry’s own recommendation of 2007 where it had objected to the telecom minister’s attempt to grant 2G licences for ₹1,658 crore (Guha Thakurta 2016a).
On this issue, the Supreme Court relied on the arguments of the Solicitor General of India Ranjit Kumar (Centre for Public Interest Litgation v Union of India 2016). He argued that BWA/4G spectrum cannot be compared with the 3G spectrum as the latter was operated in the frequency division duplex (FDD) mode while the former operated in the time division duplex (TDD) mode. FDD and TDD are two different standards of LTE technology which use frequency bands in different ways. Under FDD, separate blocks of spectrum are used for the uplink (connection from the end-user’s device to the provider’s server or tower) and the downlink (connection from the tower to the end-user’s device). So when the 3G auction was for 5+5 MHz blocks, this indicated that each successful bidder was granted a 5 MHz uplink block and a 5 MHz downlink block in the 2.1 GHz frequency band.
This separation of blocks is ideal for voice calls where equivalent amounts of data are sent in both directions. TDD, however, uses the same frequency block for both uplink and downlink connections. This makes it more suitable for data uses where the downlink connection carries much more traffic than the uplink on average. The solicitor general stated that FDD needed fewer base stations, incurred lower costs, had higher frequency usage efficiency than TDD and, therefore, their prices were different. Since RJio was granted permission to offer voice calls over the 4G network in the TDD mode, it could not be charged at the rates for 3G in the FDD mode. The solicitor general, however, overlooked DoT’s own decision of 2008 when it had decided to charge any BWA/4G winner the price of 3G spectrum, if it asked for permission to provide voice services after the auction.
In its recommendations made in October 2003 for the UAS regime, the TRAI had clarified that UAS licensees were free to use any technology without any restriction. Though there is no denying the fact that the TRAI had recommended in September 2006 and in July 2008 the differentiated prices for 3G and BWA spectrum, it had also stated in its recommendations that “the primary aim of the Authority in recommending a reserve price for BWA spectrum in India is that the spectrum should be affordable to allow all interested and qualified operators to acquire it, while at the same time, dissuade non-serious players and also to encourage efficient use and roll out.”
The solicitor general did not mention the fact that the DoT had, in its guidelines for the BWA auction issued in November 2007, proposed to auction BWA/4G spectrum in 2.5 GHz band in the FDD mode. The TRAI in its recommendations in July 2008 had suggested the auction of available spectrum in 3.3–3.4 GHz band for BWA services in blocks of 7+7 MHz (7 MHz for uplink and 7 MHz for downlink) and had left the mode of operation—FDD or TDD—to the service providers. The TRAI had stated that it did not want to specify any one mode in line with its policy of technology neutrality. The TRAI had, though, recommended auction of BWA spectrum in the 2.3–2.4 GHz band in TDD mode. However, the TRAI did not differentiate on the pricing of the BWA spectrum based on FDD or TDD modes and recommended a uniform price for spectrum in all the three bands, that is, the 2.3–2.4 GHz, 2.5–2.69 GHz and 3.3–3.4 GHz bands. In line with this thought process, neither the information memorandum for BWA spectrum nor the NIA made any reference to the mode of operation, again ostensibly to follow the established policy of technology neutrality.
The solicitor general further claimed that 4G LTE technology only appeared in 2012, a claim that the Supreme Court accepted without question. There are, however, credible documents, including TRAI reports which prove that bidders were fully aware of upcoming 4G LTE technology as early as 2008. Records show that there were more than 100 operators in 46 countries which had already committed themselves to LTE trials and deployments by the end of 2010. A few countries had already installed 4G LTE networks by late 2009.
Global Monthly Data Traffic
The court accepted the solicitor general’s submissions about the mode of operation being the reason for the costs of 3G and BWA being incomparable. It combined these with the arguments put forward by senior advocate Harish Salve who appeared in the Supreme Court for RJio. Salve argued that trends in the growth of total global monthly data and voice traffic indicated that data traffic was growing much faster than voice traffic. He also argued that the share of data traffic was nearly seven times more than that of voice traffic in the overall services provided by operators worldwide. The Court used this contention to argue that the “main source of revenue for the service providers is from data services and not voice-telephony.” The bench held that
... [i]n fact, Mr. Salve even claimed that voice-telephony for mobile companies, insofar as income generation is concerned, does not remain that attractive and in near future, there is a possibility of a situation when voice-telephony services may be provided free of charge to those using mobile data services by paying for those services. Whether this happens or not is anybody’s guess. However, what cannot be disputed is that main source of income for mobile companies is data services and not voice telephone services. This needs to be borne in mind while testing the argument of the petitioner (emphasis added) (Centre for Public Interest Litigation v Union of India 2016).
The court thus held that these contentions formed a legitimate basis for the decision to grant a unified licence to RJio and that the change in the CAG’s calculations from the draft to the final report were due to the CAG making the mistake of treating 3G spectrum and BWA spectrum as equivalent. The Supreme Court bench traced legal precedents to establish the principle that a policy decision when not found to be arbitrary, based on irrelevant considerations, or mala fide or against any statutory provisions it was not within the remit of the courts to interfere by means of a judicial review. Using these arguments, the Court ruled that the grant of the unified licence was valid and did not constitute a “back-door” entry.
On the issue of “undue benefit” being passed to RJio, the Supreme Court noted that in 2010 the spectrum was delinked from the licence unlike in 2001 when the value of the 3G spectrum was determined, and thus charging the inflation adjusted cost of the 3G spectrum as an entry fee to acquire the licence would have been incorrect. Even the calculation contained in the final CAG report was rejected on the basis of the Solicitor General’s and RJio’s submissions and the amount of ₹1,658 crore that had been charged to achieve parity between ISP licensees and UAS/CMTS licensees, was considered correct. The Supreme Court thus found no merit in the claim that undue financial benefits had been accrued by RJio. The Supreme Court also noted that the promoters of IBSPL did not derive any unfair gains and also that they did not divest or sell their equity to RIL.
Salve’s Flawed Assumptions
These arguments on which the Supreme Court relied appear to be based on flawed assumptions. First, the global monthly traffic data referred to by Salve is not relevant for India at this juncture. In India, though data traffic growth is indeed rapid, it is still generating much lower revenue than voice calls. The rural “teledensity,” as per the latest TRAI data, is 50.88% only (TRAI 2016). This means that roughly one out of two rural Indians use mobile phones while in many urban areas in India, there are more mobile phones than human beings. More importantly, mobile service providers in the country continue to derive more than three-fourths of their revenue from voice calls, as the figures in audited financial statements of major Indian telecom companies for financial year 2014–15 clearly indicate.
In 2016, Bharti Airtel, the largest such provider in India, disclosed that data revenues were only 23.3% of total revenues from mobile services. For Idea, the same figure stood at 20.1%. For Vodafone, it stood at 18%. For the public sector Bharat Sanchar Nigam Limited, it was a mere 10%. Thus, the rapid growth of mobile data services in India notwithstanding, as rural mobile phone ownership rises, voice services will continue to remain the major source of revenue for mobile service providers in the foreseeable future. Hence, the Supreme Court should have been far more circumspect before accepting the claim of Salve that voice services were of little value to mobile service providers like RJio.
Voice Services: Critical for RJio
Further, TRAI data shows that more than 95% of data traffic in India is managed by mobile service providers that also provide voice services. Had RJio not been able to obtain the permission of voice services, it would have found it extremely difficult to enter and be successful in the data market. Hence, the permission to provide voice services was precious and of utmost importance to RJio. While the technical factors distinguishing 3G and 4G technology are indeed valid, the issue of whether a 4G voice call licence can be valued at the price of a 3G licence, or how their respective prices are to be determined is still open to question. Finally the question that remains unanswered is why the scope of 4G was initially limited. It could be argued that this was done only to favour RJio.
As for the issue of bundling of spectrum with CMTS/UAS licences, in 2001 the 2G CMTS licence was bundled with 4.4 + 4.4 MHz spectrum blocks in the 1.8 GHz band whereas in 2012, the licence was delinked from the spectrum. It should however also be borne in mind that while CMTS/UAS licensees were getting 4.4 + 4.4 MHz start-up spectrum to provide voice services only, RJio got permission to provide voice services on a contiguous pan-India 20 MHz BWA spectrum. No other operator in India had this quantity of spectrum for providing voice services throughout the country. As the reserve price of per MHz paired pan-India spectrum in the 1.8 GHz band recommended by TRAI in April 2012 was ₹3,622 crore, for an additional 11.2 MHz paired spectrum provided to RJio, the corresponding price in 2012–13 would have been ₹40,566 crore. Hence undue benefit accorded to RJio would then amount to ₹26,060 crore.
Though Salve claimed that IBSPL promoters did not gain anything out of divestment of the company to RJio, it is widely known that Infotel’s promoters have been given board-level positions in the Reliance group and significant work orders have been given to Infotel group firms. These companies, which were in the red earlier, have now started earning significant profits.
As for the changes between the draft report and the final report of the CAG report, Salve claimed in the Supreme Court that the discrepancy in the numbers was due to someone “planting” misinformation in the CAG’s office. According to a reliable source within the CAG who spoke to this writer on condition of anonymity, it was other way around. He stated that key officials were under both external and internal pressure from the company. Two senior government bureaucrats who were the members of the IMC allegedly tried to influence officials in the CAG’s office to “tone down” the report. The source said that the head of RJio in Bihar met top officials in the CAG’s office and attempted to convince them to meet Mahendra Nahata, now a director in RJio. In March 2014, CAG officials allegedly received instructions from the “top” to “save” senior government officials and meet those who had sought appointments with them (Guha Thakurta 2015). Unfortunately, the PIL did not name or summon as witnesses or respondents either the CAG himself or the Director General of Audit (Post and Telecommunication) who conducted the audit and had prepared the draft report. Their views were not recorded before the Supreme Court dismissed the petition.
The CAG report on 4G/BWA auction was selected by the Public Accounts Committee of Parliament in May 2015 for examination during the year 2015–16, but this did not take place. The report has again been selected for examination by the committee of MPs (Members of Parliament) in May.
‘Let Government Decide’
The final issue before the Supreme Court related to the loss on account of lower spectrum usage charges. It had to determine whether the SUC rate being charged from RJio was correct. The Court chose not to intervene. It noted that RJio had submitted proof of compliance of roll-out obligations in 2015 within the deadline prescribed in the contract by registering with the Telecom Enforcement and Resource Monitoring Cell of the DoT before the due date in all 22 service areas. It stated that the date of this registration is taken as the date of completion of roll-out obligations on successful testing. In this case, testing is in progress and the Court concluded it was likely to be completed in a few months, although now the five-year period has passed. Technically, however, if the completion of testing is also necessary to meet the roll-out obligations, RJio has failed to meet this requirement.
Though the deadline of five years for roll-out ended on 31 August 2015, RJio has not yet rolled out the services to the general public anywhere in the country. Initially, it was to be launched in December 2015, then it was postponed to March–April 2016 and it has now been further extended to December 2016. As per the NIA, if the licensee failed to achieve its roll-out obligations, its spectrum assignment was to be withdrawn. The Supreme Court has, however, not prescribed the levy of any penalty or the withdrawal of spectrum, though neither RJio, nor for that matter any other 4G spectrum winner (such as Aircel, Qualcomm, Tikona or Augere) has rolled out 4G services for general customers as yet. The exception is Bharti Airtel which has rolled out 4G services in some limited areas.
It is to be noted here that though the 3G licensees were permitted a grace period of one year beyond the five-year period for achieving their roll-out obligations, they could use this grace period by paying liquidation damages at the rate prescribed in the NIA. On the other hand, BWA/4G licensees were not given any such grace period in the NIA. If the BWA operator does not complete its roll-out obligations within the five-year period, the spectrum assignment is required to be withdrawn. This has not been done in the case of any of the BWA spectrum holders.
As regards lower SUC charges payable by RJio, it must be stated that the BWA technologies have developed to 4G LTE (or long-term evolution) technologies over time, which also includes voice services. Post auction, RJio has been permitted to provide voice services as well, placing them at an advantageous position in comparison to other voice service providers which pay SUC at 5–8% depending upon the quantum of the spectrum held. Hence, the SUC rates should have been made uniform for all UL holders irrespective of spectrum band they use. Even TRAI had, in September 2013, recommended that SUC rate for BWA spectrum should also be uniformly fixed at 3% for CMTS/UAS/UL licensees. The CAG report raised this issue and stated that continuation of SUC at 1% for BWA/4G licensees would not only disturb the level playing field and provide significant undue advantage to RJio, but also cause a huge loss of revenue to the government over the 20-year licence period.
On the subject of the SUC, the Supreme Court noted that the matter was under “consideration” by the DoT and chose to leave it to the department’s discretion, stating that the decision was one for the government to take. Even if one agrees with this line of reasoning, the issue of SUC demands further scrutiny. It was reported on 23 May 2016 that the DoT had submitted its recommendations to the attorney general’s office seeking legal opinion. These recommendations suggested a uniform SUC for all spectrum bands ranging between 3% and 4.5% to ensure a level playing field. The suggestions would apply retrospectively, meaning that if accepted and notified, RJio and other BWA service providers would have to pay back-charges. A widely-reported note prepared by the Cellular Operators Association of India (COAI) in April 2016 has highlighted how every major telecom operator with the sole exception of RJio is in favour of a uniform SUC, preferably at 3% (Srivas 2016).
A Deloitte report quoted in the COAI note has described how even a reduction of 1% for the companies that pay SUC of up to 8% at present could result in industry-wide investments to the tune of about ₹58,000 crore and an increase in 3G connections to the extent of 230 million. An industry source told this writer on condition of anonymity that one could “read between the lines” and find out the “real game” being played on the setting of SUC rates for 3G and BWA spectrum. Whatever be the final decision of the DoT in this regard, it is certain that it will have significant financial implications, not just for companies like RJio but for the exchequer as well.
On 2 June, the Times of India reported that Attorney General Mukul Rohatgi has rejected the suggestion of a uniform SUC on the ground that it would violate the terms of BWA/4G auction (Doval and Mahapatra 2016). The government’s chief legal officer reportedly stated that the 2010 agreement for sale in the 2,300 MHz band “shows that the government has not kept any scope for revision of the rate” whereas in the subsequent auctions there was scope for revision and the government had indeed changed the rates. Rohatgi added that his predecessor G E Vahanvati had made a similar recommendation in 2014. If the attorney general’s recommendation is accepted, RJio would continue to pay 1% SUC against 5-8% paid by its competitors like Bharti Airtel, Idea Celullar, Aircel and Vodafone (which are all represented in the COAI) and the issue of a level playing-field again comes up. The COAI had earlier described the fact that RJio paid a lower SUC as “discriminatory.”
An editorial in the Economic Times on 3 June reacting to Rohatgi’s opinion argued that the variation in SUC amounted to “[i]nstitutionalised, unequal competition...earn[ing] for the country a damaging reputation for crony capitalism” and was “against natural justice and fair competition.” It suggested a solution to the problem: if the law prevented the government from increasing RJio’s SUC, then to level the playing field the government should bring down the SUC for all the other operators to the same 1%. It also recalled that the SUC is a legacy of the age when spectrum was bundled with licences and allotted by the government without any separate payment, and made little sense in the system of spectrum allocation by competitive bidding (Economic Times 2016).
On Prashant Bhushan
On 12 January 2016, Prashant Bhushan was grilled by the Supreme Court bench in open court.
Why should we hear PILs filed by CPIL [Centre for Public Interest Litigation, an NGO that Bhushan runs which had filed the PIL]? You are a professional litigant. Can you become a ‘centre’ for PIL? Can anyone walk into your office and tell you ‘I want to file a PIL?’ (Mahapatra 2016 qtd in Guha Thakurta 2016a).
Bhushan replied that it was an organisation formed by senior lawyers and had a committee comprising senior advocates who scrutinise every petition before it is filed in court. “There is a committee which comprises Fali Nariman, Anil Divan, Kamini Jaiswal, my father and myself and all petitions are scrutinised by us,” he replied.
The bench asked whether it could be confident that “a litigation is not at the instance of a party trying to settle scores with some other party” and whether the CPIL had a process by which it evaluated petitions to ensure that it was not acting on behalf of private parties trying to settle scores with others through the instrument of a PIL. It suggested that CPIL’s credibility permitted commercial interests to use it as a proxy in battles against competitors. Justice Thakur said,
When you come to us, we take you seriously. But when a commercial competitor comes to us, we might not. This competitor knows this and might send a proxy to you with documents and information which you otherwise don’t have access to. You have to establish a credible mechanism to justify that a particular case is fit to be agitated.
Outstanding Issues
Several significant issues have emerged following the 8 April judgment of the Supreme Court. First, the questionable behaviour of IBSPL during and after placing bids needs to be thoroughly investigated to ascertain whether the norms of the BWA/4G auction were violated in 2010, that is, to find out whether the auction was “rigged” as has been alleged in the draft CAG report. Even if the Supreme Court states that it is satisfied that the auction results were not challenged, this should not preclude the possibility of further investigation.
The second issue is the grant of the unified licence and the price RJio paid for it. The Court has ruled that neither the inflation-adjusted price of 3G spectrum from 2001, nor the winning bids for 3G spectrum in 2010 are appropriate prices for licensing voice telephony over the BWA network. The Court has accepted that the amount of ₹1,658 crore that was paid to achieve parity between UAS/CMTS and ISP licensees at the time of the auction is the correct amount. Nevertheless, the question that remains unanswered is how the price of a unified licence for a user of BWA spectrum is to be determined particularly when a 4G licensee gets the permission to provide voice services on 20 MHz spectrum in all 22 circles, which no other telecom service providers had.
The rate of the SUC is another significant issue that is yet to be decided. Moreover, the question as to whether RJio and other circle-specific BWA spectrum winners Aircel, Tikona, Qualcomm, Augere and Bharti Airtel should be penalised for failing to meet their roll-out obligations as per the NIA to maintain the sanctity of the auction process needs to be answered.
As for the judgment on the PIL itself, Bhushan could seek a hearing on a review petition before a larger bench of the Supreme Court. It should be possible for new individuals and organisations to be impleaded in the review petition. In that case, the Court could summon as witnesses some of the following individuals who are familiar with what has taken place: Suman Saxena, Deputy CAG, R B Sinha, former director general of audit, posts and telecommunications, S K Ghosh, senior vice president RJio, Mahendra Nahata, chairman, HFCL, Anant Nahata director, IBSPL, Arun Rane and Ajay Udgirkar of Axis Bank and Vijayalakshmy L Gupta, the then chairperson of the IMC that monitored the 2010 auction. Gupta was a former member (finance) of the Telecom Commision. She was a 1974 batch officer of the Indian Defence Accounts Service who later became financial adviser (defence finance) in the defence ministry when the present CAG of India Shashi Kant Sharma was defence secretary between 2011 and 2013. After her retirement from goverment service, she became a member of the TRAI. The other important person who knows exactly what happened during the 4G spectrum auctions in 2010 is of course the current secretary DoT, J S Deepak.
In the interest of fairness, this writer sent detailed questionnaires to the following individuals and representatives of companies to find out their responses to the issues raised: Ravi Shankar Prasad, Union Minister for Communications and Information Technology (who, incidentally, served as a legal consultant for and was paid a retainer by Reliance Industries Limited, RJio’s parent company, between April 2013 and March 2014) (Livemint 2014), J S Deepak, secretary, DoT, and spokespersons of Reliance Jio, Bharti Airtel, Idea Cellular, Vodafone India, Aircel India, Tata Teleservices and Qualcomm India. Responses were solicited to questions relating to the conduct of the auction, the role of a small firm called IBSPL, the issuance of an allegedly forged bank guarantee document by Axis Bank and the points made in the Supreme Court judgment. All these nine questionnaires were emailed on 17 May. Till the time of publication, only one response was received, namely, from the spokesperson of the Bharti Airtel group declining comment.
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