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Telecom
India
Post CAG report action – update. As a first step towards addressing the issues raised
in the CAG report, the DoT has decided to issue show-cause notices to (1) 85 new
licensees on ineligibility to apply for UAS licenses, and (2) 119 licensees (across licenses
issued on 2008 and 2006) on failure to meet rollout obligations. In a press conference
to announce this step, the new telecom minister reserved his comments on spectrum
pricing issue.
First steps, post the CAG report, on expected lines
The first step from the Government on the issues raised in the CAG report was on expected lines.
In a press conference, the new telecom minister announced serving show-cause notices to new
licensees on counts of not meeting eligibility criteria for UAS license application and not fulfilling
rollout obligations. We discuss in detail below
Show-cause notice to 85 new licensees for not meeting eligibility criteria for UAS
license application. We note that a total of 122 licenses were granted in 2008 to a total of 9
companies. The show-cause notice asking the licensees to respond (within 60 days) on why
their licenses should not be cancelled has been issued on grounds of (1) not meeting the
minimum net worth criteria, and/or (2) not having ‘telecom business’ in their memorandum of
association. The minister clarified that these companies should have met these criteria on
the date of application; we note that most of licensees took steps to meet eligibility norms
post the application date.
Show-cause notice to 119 new licensees for failure to fulfill rollout obligations. 81 of
these overlap with the issue above. The UAS license mandates 10% district HQ coverage within
a year of date of spectrum grant, and 50% coverage within 3 years. License conditions allow
the licensor (the DoT) to impose penalties if rollout obligations are not met at the end of 1st year
and cancel licenses if obligations are not met within another 52 weeks. We note that some
show-cause notice on this count has also been sent to some licensees who were granted the
UAS license in 2006.
The Swan Telecom (now Etisalat DB Telecom) ownership issue. Terming it a complex
issues, the minister mentioned that the DoT has asked the Ministry of Corporate Affairs to
investigate Swan’s ownership in detail. We note that Reliance Telecom, a subsidiary of RCOM,
had a 9.9% stake in Swan at the time of license application. RCOM, in a recent analyst call,
clarified that it had divested this stake to Mauritius-based Delphi investments on Dec 5, 2007,
and had no stake in Swan on the date of license grant (Jan 10, 2008).
2G spectrum pricing issue. The minister chose to reserve his comments on this issue, while
mentioning that the Government would look at this issue in a greater level of detail.
Interestingly, he did mention that one should refrain from linking 2G spectrum price to the
auction-discovered 3G spectrum price.
We list the new licenses issued in Jan 2008 in Exhibit 1 and discuss key highlights of the CAG
report on the next page.
CAG report – background and key highlights
The CAG (Comptroller and Auditor General of India) report on ‘issues of licenses and
allocation of 2G spectrum by the DoT’ was driven to delve deeper into two key issues –
(1) irregularities in the license grant process in the latest round of license grants – Jan 2008,
and (2) allocation of start-up spectrum (2 X 4.4 MHz) to the new licensees at 2001 auction
benchmark prices. In addition to these, the CAG has also commented on the excess
spectrum (beyond 6.2 MHz) held by incumbents, the introduction of dual/alternativetechnology
clause in the UAS license agreement, and non-compliance of rollout obligations
by new licensees. The CAG has given a presumptive estimate of the loss to the exchequer on
account of these – between Rs577 bn and Rs1.76 tn. Other key highlights from the report
DoT’s decision to take new license applications only till a cut-off date (Oct 1, 2007) was
arbitrary and in contradiction to TRAI recommendation of no cap on number of licenses
issued. Further, this date was later advanced to Sep 25, 2007, again arbitrarily.
Applicants for 85 of the 122 new licenses granted (excluding the 35 issued to dualtechnology
players) were found to be ineligible at the time of application. As per the
report, these applicants ‘had suppressed facts, disclosed incomplete information and
submitted fictitious documents’. Some of the names here include Swan (now Etisalat DB),
Uninor, Loop, Datacom (now Videocon Mobile) and S Tel. In some cases, the minimum
net-worth criterion was not met, while in some others the substantial equity clause was
violated.
First-come-first-served policy earlier adopted for allocation of spectrum was also not
followed. Applications submitted between March 2006 and Sep 2007 were issued LoI on
a single day on Jan 10, 2008. A notice was issued through a press release giving less than
an hour to collect the same. Some licensees who had knowledge of this were ready with
demand drafts and avail the benefit of the first right to allocation of spectrum.
Spectrum was allotted to existing operators beyond the contractual limits without
charging any spectrum charge. DoT was not processing applications of new operators on
grounds of non-availability of spectrum but was allocating spectrum to existing operators
beyond the contractual limits. Applications submitted between 2004 and 2006 were
delayed by a period of at least 1-3 years without giving any specific reason.
Non-fulfillment of rollout obligations – as per the conditions of the UAS licence, licensees
were required to roll out the services in the 90% service area in metros and 10% of DHQ
in other service areas within 12 months but none of the 6 new licensees had met the
rollout obligations till Dec 2009.
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