After the scam broke: How the 2G controversy shaped telecom policy, impacted industry

Earlier this year, the Reserve Bank of India red-flagged the telecom industry and asked banks to review their exposure to the sector.

Written by Pranav Mukul | Updated: December 21, 2017 8:47:56 am
Sunil Bharti Mittal, Chairman and Managing Director, Bharti Airtel, with Norwegian firm Telenor’s CEO Jon Fredrik Baksaas, address the media outside the Finance Ministry after a 2012 meeting of the Finance Minister with chiefs of top telecom firms. (Express Archive)

The cancellation of telecom licences by the Supreme Court in 2012 in the 2G case prompted the key stakeholders — the government and telecom operators — to revamp the way the telecom sector functioned in India, especially how airwaves were offered to operators. While on the policy front, spectrum allocation started happening through auctions, for corporates, especially foreign players, the verdict forced many to cut back on their India exposure. Consequently, the verdict impacted the bank books, loans to telecom companies and infrastructure providers, comprising nearly 3% of the portfolios for lenders at that time.

The companies that saw their licences being cancelled included those with investments from foreign players, such as Norway’s Telenor, the UAE’s Etisalat, Russia’s Sistema, Bahrain Telecommunications, Malaysia’s Maxis, etc. While initially the industry expressed concern over the impact on foreign investment in India’s telecom market, analysts suggest that allocating spectrum at lower prices in fact opened the door to players who may not have been serious about rolling out networks at that point in time.

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In 2012, from the pool of operators, 18 had their licences cancelled. As of date, 11 companies offer mobile services in the country, and if the proposed mergers and acquisitions go through, only five operators will remain — Bharti Airtel, Vodafone-Idea, Reliance Jio, BSNL and MTNL. This is in line with developed telecom markets where four or five companies dominate the sector.

“Mr Raja’s approach created an artificial demand for spectrum by keeping it under-priced. If the spectrum was priced closer to its real value, it would not attract so many players. Non-serious players would not have sought it,” Mahesh Uppal, Director, ComFirst India, said.

Compared with how spectrum is allocated to companies after auctioning it today, under A Raja, the Department of Telecommunications (DoT) sold licences to operate 2G services along with spectrum deemed necessary to deploy these services. Following the cancellation of licences, Norwegian telecom company Telenor, which offered services in India in a joint venture with real estate firm Unitech, said that it had already invested over Rs 6,100 crore in equity and over Rs 8,000 crore in corporate guarantees, and that the company was “shocked to see that Uninor is being penalised for faults the court has found in government procedure.”

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Bundling the spectrum with the licences and selling this on a first-come-first-served basis resulted in the allocation of airwaves at a much lower price than the market would have dictated — Rs 1,76,000 crore — as estimated by the Comptroller and Auditor General (CAG) of India.

However, the case — in which charges against several bureaucrats were also framed — impacted how the auction process was designed to allocate spectrum at market discovered prices. The latest example was seen during the 2016 auction where, despite a clear lack of intent from the industry, the highly priced spectrum in the 700 MHz frequency was put under the hammer. In its internal pre-auction estimates, even the DoT did not expect the 700 MHz spectrum to be fully sold. Throughout the auction, not a single bid by any operator was placed.

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“The problem is very simple. If demand exceeds supply, auctions are your best bet. The process of auction itself is not the issue, it is the design. There are many different ways of conducting the auction. For example, if the government said auction winners would have to make the payment within a week instead of 10 years, many companies would exercise caution. Similarly, if there was a penalty if the services aren’t rolled out within, say, two months of allocation, some players would have opted out,” Uppal commented.

“The government also designed the auction with the primary focus of maximising revenues and not to speed up rollout of broadband or improve the quality of services. If you do that, then you increase the harm an auction can do. If instead, for example, the government had sought bids of how much revenues companies would share with it, there would have been less harm to service growth or consumers,” Uppal said.

The government’s pursuit of higher revenues through auctions, which is seen to be a direct result of the CAG’s observations on the loss of revenue through administrative allocation, has also resulted in spectrum becoming costlier, one of the factors cited by telecom players analysing the financial condition of these companies.

Earlier this year, the Reserve Bank of India red-flagged the telecom industry and asked banks to review their exposure to the sector. An inter-ministerial group was formed, headed by DoT Secretary Aruna Sundararajan, to suggest measures for reducing financial stress in the sector.

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