Thursday, January 10, 2008: There was total pandemonium at Sanchar Bhawan, the office of the Department of Telecom. Representatives of wannabe telecom companies literally got into fistfights and blows in a bid to be the first to get the letter of intent (LoI).

After keeping nearly 46 applicants on tenterhooks for almost three months, the telecom department, headed by Andimuthu Raja, announced at 2.45 p.m. through a press release that LoIs would be issued between 3.30 p.m. and 4.30 p.m. to those companies that first submitted the bank guarantees and other documents. This gave a window of only one hour for the company representatives to fulfil all eligibility criteria for the letter.

All hell broke loose as the companies made a beeline to the second floor of Sanchar Bhawan, where the letter was being issued.

The atmosphere turned menacing after one of the applicants got a hired goon to ensure his company was the first to enter the gates.

Bollywood stunts would pale in comparison to what followed, as some of the company representatives were physically thrown out of the queue by a rival company. To add to the drama, one of the executives at the receiving end even threatened suicide on the spot if he were not allowed to enter the building. Some of the companies whose applications were rejected went on an impromptu protest, adding to the chaos.

Finally, LoIs were issued to nine companies based on a distorted version of the first-come-first-served policy. Real estate giant Unitech got LoIs for 22 circles, Datacom (which later became Videocon) for 22, Loop and Shyam 21, Idea nine, STel six , Spice four (it had applied for pan-India), Swan 13, and Tata Teleservices got LoIs for CDMA services in three circles.

Thus was born the spectrum scam; and Raja earned the sobriquet Spectrum Raja.

Cut to the present. October 19, 2012 was the last day to apply for bidding in the spectrum auction.

This was the same spectrum that Raja had given out in 2008 and was later revoked by the Supreme Court, which told the Government to cancel all licences issued on or after January 10, 2008 and auction the freed spectrum. The telecom ministry cancelled 122 licences and put only a part of the freed spectrum up for auction.

The reserve price for pan-India 5 Mhz spectrum was set at Rs 14,000 crore. Sanchar Bhawan, which was besieged by companies in 2007, wore a deserted look on the last day of application. By evening only five players evinced interest in GSM spectrum and two in CDMA. Two days later the two bidders for CDMA withdrew. The auction had flopped even before it started.

Communication and IT Minister Kapil Sibal was quick to blame the TRAI, the Comptroller & Auditor General and the court for the damp-squib response. “I think this is a lesson that all of us put together should learn and that institutions charged with the responsibility of doing certain things should be allowed to do those things,” Sibal said a day after the auction ended.

He said the base price was fixed high on TRAI’s recommendation as the CAG had said the Government could have got Rs 1.76-lakh crore by auctioning spectrum in 2008. “Where are those Rs 1.76-lakh crore?” the Minister took a dig at the CAG.

But analysts and telecom companies blame the Government for the failure, as there were enough warnings before the auction.

Prashant Singhal, partner in a member firm of Ernst & Young Global, says, “The results of the auction clearly indicate that the reserve price was completely off the mark. All in all, a big embarrassment for the Indian government, but one could see it coming, and a big disaster, which could have been avoided with a more sensible reserve price. But one could see it coming.”


Market watchers say the Government’s initial reaction seems to strengthen the theory that the entire auction was designed to prove the CAG and court wrong. “It appears as if the entire auction was stage-managed. The Department of Telecom has misinterpreted the Supreme Court order,” says B.K. Syngal, former chairman of Videsh Sanchar Nigam Ltd (now Tata Communications).

According to him, the court order should have resulted in the cancellation of 178 licences and not 122 as projected by the DoT.

“No one seems bothered about the loss to the consumer because of the Government’s failure to sell spectrum properly twice,” he added.

Analysts say the CAG’s estimate of loss was based on the telecom market in 2008, when the mobile market was still growing at 15-20 million users a month.

“In 2008 there were 46 companies interested in taking the licence but Raja gave away spectrum at Rs 1,650 crore, and in 2012 when only five players were interested the Government has decided to price spectrum at Rs 14,000 crore. In both cases the Government got the pricing wrong. The question is whether the Government does not know how to set the right price, or does it not want to set the right price,” said an industry representative.

Flawed continuity

Besides wrong pricing there are several similarities between 2008 and 2012. Soon after spectrum was allocated to new players in 2008, some made windfall gains by selling fresh equity to foreign players.

Unitech, which was one of the players to get new licences in 2008 at 2001 prices, had sold a 67.25 per cent stake to Telenor for Rs 6,120 crore. Swan and STel also did equity deals with foreign players. In 2012, after the auction failed, the market capital of Bharti Airtel, Idea Cellular, Reliance Communications and Tata Teleservices has risen by Rs 11,286 crore.

The Supreme Court has hauled up the Government for its casual dealing of the spectrum sale. The court said the Government must explain why it did not auction the entire spectrum that became available after its February 2 order quashed licences.

“In the overall analysis, the high reserve price and several large markets remaining unsold will prove to the Government that though spectrum may be a scarce resource, it certainly does have a finite price, and increasing the reserve price to stratospheric levels will not result in any greater value being realised,” said Himanshu Kapania, CEO, Idea Cellular, explaining the muted response from operators this time.

The pandemonium that started from Sanchar Bhawan on January 10, 2008 continues in the telecom sector.

A Govt that does not know the price, or value, of spectrum?

Messing up spectrum pricing and allocation is not new to the Department of Telecom. Since private operators were given telecom licences 18 years ago, DoT has had multiple opportunities to get the spectrum allocation policy right. And each time it seems to get it wrong.

Back in 1994, when telecom licences were given out for the first time, a flawed auction design allowed non-serious players to bid astronomical sums and then default on payments. The Government was forced to convert the auction fee to an annual revenue share under a New Telecom Policy in 1999.

In 2001, the Telecom Ministry allowed fixed line operators to convert their licences to offer limited mobile services using CDMA technology. This led to litigation and, finally, the operators were forced to pay Rs 1,650 crore to become full mobile players. While CDMA players had initial success, most of them later shifted to GSM. In the latest round of auction there were no takers for CDMA spectrum.

In 2002, operators were given additional spectrum on subscriber-linked criteria without any upfront fee. This was the first time anywhere in the world spectrum was given based on number of subscribers. Now the current Government, as if to rectify a mistake, wants to impose a one-time fee on all operators who got additional spectrum over the past ten years.

In 2008, the then telecom minister A. Raja decided to give away fresh licences on first-come-first-served basis at throwaway prices to a few players, despite having as many as 46 players waiting in line. These allocations were later cancelled by the Supreme Court on grounds of impropriety.

The latest failure adds to the Government’s list of missed opportunities. But it’s not always been on the wrong side.

The Government got it right twice in the past. In 2001, GSM licences were sold through auction, which was fairly successful and fetched the Government Rs 1,630 crore.

The price derived from this auction was in use until 2008 when Raja gave away licences to new players. But the biggest success came in 2010 when 3G and broadband spectrum was sold. The Government netted over Rs 1 lakh crore from these two auctions.

(This article was published on November 22, 2012)
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