2G SPECTRUM ALLOCATION SCAM

· Highlighting gross irregularities in the allocation of 2G spectrum in 2008, the Comptroller and Auditor General of India has said that the entire process lacked transparency and was undertaken in an arbitrary, unfair and inequitable manner, causing a presumptive loss of over Rs. 1.76- lakh crore to the exchequer. It indicates the former Communication and Information Technology Minister A.Raja for failing to adhere to laid guidelines and ignoring the concerns and advice of Prime Minister and the Union Finance and Law Ministers. Mr. Raja made to quit; leaked phone conversations with corporate lobbyist Niira Radia leave many red-faced. Mr. Raja also facing some other charges e.g. allocating spectrum throwaway prices, some telecom companies- Unitech, Swan etc. got licenses without any prior telecom experiences , Swan telecom was given licenses even though it did not meet eligibility criteria, the spectrum were allocated on the “first come, first serve basis”. Mr. Raja ignored guidelines provided by TRAI, Prime Minister, Ministry of Finance and the Ministry of Law and Justice.

· The CAG’s report said that DoT issued 122 new licenses for 2G spectrums in 2008 at 2001 prices by flouting every canon of financial propriety, rules and procedures. The DoT did not follow its own guidelines on eligibility conditions, arbitrarily changed the cut-off date for receipt of applications post-facto and altered the conditions of the first come first served procedure at crucial junctures without valid and cogent reasons, thereby giving unfair advantage to certain companies over others.

· Underlining the need for fixing responsibility and enforcing accountability for the lapses, the report said entire process of allocation of 2G spectrum raises serious concerns about the system of governance in the DoT, which needed to be thoroughly reviewed and revamped. The fact that there has been loss to the national exchequer in the allocation of 2G spectrum can’t be denied. However, the amount of loss could be debated.

· The Central Government on December 9 formed a one –member committee to examine the process and procedures followed by the Department of Telecommunication in the grant of licenses and allocation of spectrum. The One man committee formed by Union Communication and IT Ministry, headed by retired Supreme Court Judge Shivraj V.Patil examined the appropriateness of the procedures adopted by the DoT in the issuance of licenses and spectrum allocation during the 2001-2009. The committee, who submitted its report to the Union Ministry of Communication and It, has identified officials responsible for serious lapses in implementing the telecom policy transparently and fairly. The committee in its report found Telecom Ministers between 2001 and 2009 guilty of ignoring Cabinet decisions and overlooking the recommendations of the TRAI and called for multistage bidding process for allocating spectrum instead of the first-come, first-serve procedure.

· The opposition and other partied are demanding to a Joint Parliamentary Committee probe of the scam. Note that the Public Accounts Committee (PAC) of Parliament is supposed to conduct a detailed examination of the reports of the Comptroller and Auditor –General (CAG), scrutinizing the yearly accounts of the Government. Having 15 members of the Lok Sabha and seven members of the Rajya Sabha, the chairmanship of the PAC conventionally goes to a nominee of the main opposition argument is that the 2G spectrum scam goes far beyond accounting. A JPC can spread its net wider and go into the larger gamut of allocation and looks into the role of various players. Moreover, once a JPC gets going, it would help the opposition keep the heat on the government through consistent reporting of proceedings. The moot point is that PAC chairman Murli Manohar Joshi is already waiting in the wings to go into the CAG report. In case the government accepts the demand for a JPC, in effect, it may mean both a JPC and PAC.

· On Jan. 10, 2011 the Supreme Court issued notice to the 11 telecom companies- Etisalat, Uninor, Loop Telecom, Videocon, S-Tel, Allianz Infra, Idea, Cellular , Tata Tele Services, Sistema Shyam Teleservices, Dishnet wireless and Vodafone- Essar- which were granted licenses after Jan.2008.

· The S.C. on 1.2.2011 said any step taken by the Centre on regularization of 2G spectrum licenses for non-fulfillment of conditions or roll out obligations would be subject to the final orders to be passed by the court on pending petitions. According to this if licenses are to be cancelled, it can’t be done only on the basis of the report of the CAG, though it may be a ground for cancellation.

· Mr. Raja and Siddartha Behura, former Secretary in the Dept. of Telecommunication were arrested by CBI on Feb.2011. The CBI on March 2011 also informed the Supreme Court that so far 63 persons, including CEOs, promoters, MDs and senior officials of beneficiary companies were among those interrogated or being examined in this issue.

· After resisting the opposition demand for over three months, the government has finally agreed to constitute a JPC to probe the 2G spectrum allocation issue on Feb. 22^nd 2011. It will have 30 members, 20 of which from Lok Sabha and 10 from Rajya Sabha and will be headed by Congress leader P.C. Chacko.

What is Spectrum?

Radio waves are a type of electromagnetic radiation with wavelength radiation with wavelength in the electromagnetic longer than infrared. Like all other electromagnetic waves, they travel at the speed of the light. Naturally occurring radio waves are made by lighting or by astronomical objects. Artificially, generated radio waves are used for fixed and mobile communication, broadcasting , radar and other navigation systems, satellite communication, computer networks and innumerable other applications. Different frequencies of radio waves have different propagation characteristics in the earth’s atmosphere; long waves may cover a part of earth very consistently, shorter waves can reflect off the ionosphere and travel around the world, and much shorter wavelengths bend or reflect very little and travel on a line of sight. Radio waves have a frequency range between 10KHz to 300 MHz. Different parts of radio spectrum used for different purposes.

Bandwidth is a difference of Upper and Lower Frequencies
Frequency range of radio wave	Application
450-470 MHz	AM radio, used by All India Radio around the country
698-806 MHz	Short-wave radio, used Defence and by global radio stations to transmit over long distance.
824-844 MHz	Terrestrial TV, channels 2-6 used by Doordarshan.
890-915 MHz	FM Radio used by All India Radio and several private radio channels across the country.
1805-1880 MHz	Cable television, a wide range of frequencies used by cable operators to beam TV signal into homes.
1900-1910 MHz & 1920-1980 MHz	Mobile phones, GSM and CDMA operators use for cellular service(2G)
2110-2170 MHz	Mobile phones, for offering high quality data and voice mobile services (3G)
2300-2400 MHz	Broadband Wireless used for 4G technologies such as Long Term Evolution (LTE), WiMax for high speed broadband.
2500-2690 MHz	S-band, mostly used for satellite services under Dept. of Space. Globally used for mobile broadband.
1-10 GHz	Radar

Arrests and Chargesheet

On February 2, 2011, the Central Board of Direct Taxes arrested former Telecommunications Union Minister Andimuthu Raja. The CBDT also arrested R.K. Chandolia, Raja's personal aide, and Siddharth Behura, the former Telecom Secretary.^[28][29] Both Raja and Chandolia are heard in conversation with Niira Radia in the released Radia tapes.

On February 8, 2011, the CBI arrested Mumbai based Dynamix Balwas (DB) group managing director Shahid Usman Balwa in connection with the 2G spectrum allocation scam. The CBI has evidence from the Income Tax department that Shahid Usman Balwa, considered close to Raja, was instrumental in channeling the kickbacks allegedly received by the former telecom minister.

On March 29, 2011, in Delhi, the CBI arrested Asif Balwa (younger brother of the arrested former Managing Director of DB-Etisalat Group, Shahid Balwa) and Rajeev Agarwal for their alleged involvement in money transfer to the Dravida Munnetra Kazhagam's (DMK) Kalaignar TV channel.

On April 2, 2011, the CBDT filed its first 80,000 page charge sheet in the 2G spectrum scam before a Special Court in Delhi naming nine individuals and three companies. It said the wrongful acts of the accused deprived the government exchequer of possible revenues amounting to INR Rs 30,985 crore (USD $ 6,983,322,233). The accused include the following individuals.

1. Andimuthu Raja, former Telecom minister
2. Siddharth Behura, former Telecom Secretary
3. R.K. Chandolia, Raja's former personal secretary
4. Shahid Usman Balwa, former Director of Swan Telecom (now Etisalat DB)
5. Sanjay Chandra, Managing Director of Unitech Ltd and Unitech Wireless
6. Gautam Doshi, Group MD, Reliance Anil Dhirubhai Ambani Group
7. Hari Nair, Senior Vice-President, Reliance Anil Dhirubhai Ambani Group
8. Surendra Para, Senior Vice-President, Reliance Anil Dhirubhai Ambani Group and Reliance Telecom Ltd
9. Vinod Goenka, Director, Swan Telecom (now Etisalat DB)

The three companies named are:

1. Swan Telecom
2. Unitech Wireless
3. Reliance Telecom

In the first chargesheet, the CBI had named lobbyist Niira Radia and 124 others as witnesses.

On 25 April 2011, in its second chargesheet in the scam, the Central Bureau of Investigation (CBI) named five more accused individuals:^[33]

1. Kanimozhi - Rajya Sabha Member of Parliament (DMK) and daughter of Tamil Nadu ex-Chief Minister M Karunanidhi
2. Sharad Kumar of Kalaignar TV
3. Karim Morani of Cineyug Films
4. Asif Balwa of Kusegaon Realty
5. Rajiv B Agarwal of Kusegaon Realty

On 20 May 2011, Special CBI Judge O P Saini of the Delhi court ordered the arrest of DMK Member of Parliament Kanimozhi and Kalaignar TV Managing Director Sharad Kumar after rejecting their bail pleas in the 2G spectrum case.

Summary of CAG report on 2G spectrum scam

This Report for the year ended March 2010 has been prepared for submission to the President under Article 151 of the Constitution. The Report contains the results of examination by Audit of the Issue of Licenses and Allocation of 2G Spectrum of Department of Telecommunications, Ministry of Communication and Information Technology. The audit covers the period from

2003-04 to 2009-10.

I. Changes in the Telecommunications sector in India

In the last two decades the telecom sector witnessed rapid transformation with the National Telecom Policy-94 setting the stage for opening up of the sector. With changes in the sector, cellular mobile services outgrew the fixed line services. The most important change was the shift to a revenue sharing regime in National Telecom Policy (NTP) 1999 where the operators shared their revenue with the Government in the form of annual licence fee and spectrum charges. The Unified Access Services Licence (UASL) 2003 sought to frame the road map for a uniform licencing regime.

II. Why did we decide to do an audit on the Issue of Licence and allocation of Spectrum now?

This sector has witnessed dynamic and rapid transition. It had been subject to audit and a report titled “Package of Concessions Given to Cellular Mobile Operators” was presented to Parliament in May 2000. A further review of the “Revenue Management in the Department of Telecommunications” was also undertaken by this office in 2004-05. This review mainly focused on the system of collection and accounting of licence fee and spectrum charges from the licensees. The Report based on this review was presented to Parliament in May 2006.

In January 2008, Department of Telecommunications issued 120 new licences for unified access services on the same day. These licences were issued at price which had been discovered in 2001. Issuance of 120 licences in just one day and at a price discovered in 2001 has drawn the attention of Media, Parliament and informed members of the civil society. Questions have been raised regarding the transparency in the allocation process and the failure in maximization of revenue generation from the allocation of spectrum, which is a national asset. This department had been receiving innumerable references from Members of Parliament and other sources repeatedly, questioning the allocation process and the price fixed for such allocation. The claim in each such reference is that ineligible applicants seem to have been granted licences and at a price which appeared far below what has been perceived to be the appropriate market price in 2008. It was in this context that this department felt that there was a sufficient justification to review the entire process of issuance of licences, award of spectrum and the implementation of the UAS regime. The need for doing so was further justified as six years have passed since the introduction of the UAS regime in 2003. While accepting the Government's prerogative to formulate the policy of UASL, it was felt that an in-depth examination of implementation of such policy needed to be done.

III. How this Report is Organised?

Chapter 1 and 2 of this Report give the Policy Overview, System of issue of licences & allotment of spectrum and the Audit Approach. In Chapter 3, we have narrated the Audit findings relating to the implementation of UAS policy and Chapter 4 details the findings on the procedural lapses. Chapter 5 attempts to highlight the various indicators available to assess the presumptive value of spectrum. To attempt at deriving a maximum realizable economic value for allocation of 2G spectrum licences in 2008, recourse would have to be taken to a menu of different economic models. Each such model would be based on certain assumptions which may not necessarily be obtained when Government decides on a price for a scarce national asset as there would be no foolproof market discovery mechanism at any point of time. Each set of assumptions underlying the economic models could be open to questions and be disputed.

For this reason we have only attempted to arrive at a presumptive value in this Report.

IV. Major Findings

(i) Gaps in policy implementation

In August 2003 TRAI had submitted a Report recommending a road map for allocation of licences. This Report formed the basis for the UAS policy approved by the Council of Ministers in October 2003. The implementation of UASL regime was to be carried out in two phases with first phase of six months assigned for migration of already existing Basic Service Operators (BSOs) and Cellular Mobile Service Operators (CMSOs) to the new regime. The entry fee for migration of BSOs was determined as the fee equal to what was paid by the fourth cellular operator introduced through multi-stage bidding process in 2001. CMSOs were not required to pay any entry fee for migrating as they had already entered the market through a bidding process and thus paid a market determined price.

The second phase was to start after the first phase in which a Unified Licencing regime, with a nominal entry fee for the licence with the spectrum being charged separately, was envisaged.

However, Audit examination reveals that the Department of Telecom did not implement the licensing regime as approved by the Cabinet and implemented only the first phase of the policy, overlooking the second phase. In the actual implementation, the interim stage of implementation seems to have become the final destination. This appears to have become the underlying factor, quite erroneously, to value the spectrum in 2008 at 2001

prices. An important objective of this policy decision to delink the prices of spectrum from the issue of licence and devise an efficient allocation formula for spectrum along with an appropriate price, remained unachieved. Ministry of Finance was authorized by the Cabinet decision of 2003 to participate in the discussion for efficient allocation of spectrum and price fixation but DOT decided not to associate the Ministry of Finance.

As a consequence of such lacunae in the implementation of the policy laid down by the Council of Ministers in 2003 the issuance of licences in 2008 along with allocation of spectrum has been done by DoT at prices determined in 2001 which were based on a totally nascent market despite the sector witnessing substantial transformation and manifold growth. The issue was never placed before Cabinet for a review.

(ii) Telecom Commission was not consulted

From a scrutiny of the records and information made available it appears that the High Powered Telecom Commission which also includes part time members from the Ministry of Finance, Industry, IT and Planning Commission was not apprised of the TRAI recommendations of August 2007 and hence, was not afforded an opportunity to deliberate on the merits of the TRAI recommendations. It is also seen that the High Powered Telecom Commission was not even consulted at the time of grant of 122 UAS

licences in 2008.

(iii) Views and concerns of Ministry of Finance overruled

It was noted in Audit that DoT managed to keep the issue of spectrum pricing outside the purview of the GoM. The GoM's role in December 2006 was confined to issues concerning spectrum vacation. The ToRs left out the other two issues of efficient allocation and pricing, while all three were pronounced in the policy decision of 2003. Thus by getting the spectrum pricing issue deleted from the ToR, the DoT completely side-tracked the pricing issues.

It has also been revealed in the course of audit that the Ministry of Finance, in November 2007, had questioned the sanctity of continuing with the price determined way back in 2001 without any indexation or current valuation. The Ministry had sought a review of the matter. This advice of the Ministry of Finance was overlooked by the DoT ostensibly on the basis of a four-year old Cabinet decision (October 2003) on the premise that it was authorized to calculate the entry fee for licences as per the recommendations of TRAI in

2003 . DoT maintained that 'spectrum pricing was within the normal work carried out by them.'

(iv) Advice of Ministry of Law and Justice were ignored

In October 2007 at its own initiative, the DoT requested the Ministry of Law and Justice to obtain and communicate the opinion of the Attorney General/Solicitor General of India to enable the DoT to handle an unprecedented rush of applications in a fair and equitable manner which would be legally tenable. The Ministry of Law, at the level of the Hon'ble

Minister, opined that in view of the importance of the case and the various options which seem to have emerged, it was necessary that the whole issue be first considered by an Empowered Group of Ministers (EGoM) and in that process legal opinion of the Attorney General can be obtained. Surprisingly, this opinion, which the DoT had sought on its own volition, was felt to be 'out of context' at the level of the Hon'ble MoC&IT and hence the benefit of a discussion in the EGoM was also forgone. Thus, such important decisions

seem to have been taken in DoT without the issues being deliberated and discussed at an inter ministerial forum.

(v) Hon'ble Prime Minister's suggestions were not followed

In November 2007, the Hon’ble Prime Minister wrote to Hon'ble MoC&IT and expressed concern that in the backdrop of the inadequate spectrum and the unprecedented number of applications received for fresh licenses, spectrum pricing through a fair and transparent method of auction for revision of entry fee, which is currently benchmarked on an old figure, needs to be reconsidered. This advice of the Hon’ble Prime Minister evoked an immediate response from the Hon'ble MoC&IT who on the same day replied that the

issue of auction of spectrum was considered by the TRAI and the Telecom Commission and it was not recommended by them as the existing licence holders had already got spectrum upto 10 mega hertz per circle without any spectrum charge. Hon'ble MoC&IT further informed that his Ministry has come to the conclusion that it will be unfair, discriminatory, arbitrary and capricious to auction spectrum to new applicants as it will not give them a level playing field. He had thus, justified the allotment of spectrum to a few new operators in 2008 without reconsidering the old entry fee discovered in 2001 ignoring the advice of the Hon'ble Prime Minister.

(vi) Arbitrary changes by DoT in the cut-off date.

The TRAI report of August 2007 had recommended 'no cap' on the number of licences in any service area. Despite this recommendation of TRAI, the DoT issued a Press Release on 24th September 2007 stating that applications for issue of licences would be accepted only upto 1.10.2007. This action, in effect, conveyed fixation of an artificial cap in the number of licenses to be awarded. However, in its response (July 2010) to the report issued to the Ministry (July 2010), the Ministry has stated that it accepted the recommendation of 'no cap' by the TRAI in October 2007. It seems that the Ministry, by issuing the press release in advance in September 2007 had, in effect, circumvented the recommendation of TRAI by taking an action counter to the recommendation and its acceptance by DoT in October 2007. To further compound the earlier decision, of restricting consideration of applications received up to 1.10.2007, the DoT further advanced this date to restrict issuance of Letters of Intent (LoIs) only to applications received up to 25.09.2007. This was ostensibly to avoid legal implications in view of the

shortage of spectrum for GSM services.

(vii) FCFS Policy was not followed

The First Come First Served (FCFS) policy earlier internally adopted in DoT for allocation of spectrum,was then extended for issue of new UAS licences. Under this policy, all applications are registered in the Central Registry Section of DoT where date of receipt and serial numbers are posted on it. Priority of applications is determined based on this date of receipt in the Central Registry. In a communication dated 2nd November 2007, the

Hon'ble MoC&IT had even confirmed to the Hon'ble Prime Minister that the processing of applications was to be on the FCFS basis. However, audit found that DoT deviated even from the FCFS policy in letter and spirit. The applications submitted between March 2006 and 25th September 2007 were issued the LoIs simultaneously on a single day, viz. 10th January 2008. A notice was issued through a press release giving less than an hour to collect the same. This decision to issue LoIs simultaneously to all applicants was taken at the level of the Minister. As per the FCFS policy being followed those who were issued LoIs were given 15 days to fulfill the conditions. This included submission of a Performance Bank Guarantee (PBG) and a Financial Bank Guarantee (FBG). By changing the FCFS criteria, some licensees, who could proactively anticipate such procedural changes were

ready with the Demand Drafts drawn on dates prior to the notification of cut off date by DoT and could avail the benefit of first right to allocation of spectrum, having jumped the queue. The entire process followed lacked transparency and objectivity and has eroded the credibility of DoT.

(viii) Issue of license to ineligible applicants

Process followed by the DoT for verification of applications for UAS licences for confirming their eligibility lacked due diligence, fairness and transparency leading to grant of licences to applicants who were not eligible. Eighty five out of the 122 licenses issued in 2008 were found to be issued to Companies which did not satisfy the basic eligibility conditions set by the DoT and had suppressed facts, disclosed incomplete information and submitted fictitious documents for getting UAS licenses and thereby access to spectrum.

(ix) Presumptive value of spectrum allocated to 122 new UAS licencees and 35 Dual Technology licencees in 2007-08

Any loss ascertained while attempting to value the 2G spectrum allocated to 122 licencees in 2008 can only be 'presumptive', given the fact that there are varied determinants like its scarcity value, the nature of competition, business plans envisaged, number of operators, growth of sector etc. which, depending upon the market situation, would throw up the price that it commands at a given point of time. Instead of attempting to come to a specific

value of 2G spectrum which could have been possible only through an efficient market discovery process, we have looked at the various indicators to assess a possible (presumptive) value, from the records made available to Audit rather than going for any mathematical/econometric models.

1. On 5th November 2007 through a letter addressed to the Hon'ble Prime Minister, S Tel limited who was a prospective licencee, having applied for UAS licences in July/September 2007, had offered to pay a higher price in the shape of additional revenue share for next ten years. The offer was enhanced by the firm with a stipulation to further revise it upwards, in case of any counter bid. At the prices offered by the Company, value of 122 new licenses and 35 Dual Technology licenses after discounting for the receivables in future years works out to Rs 65,909 crores as against Rs 12,386 crores actually received.

2. Auction of 3G spectrum was recommended by TRAI in its Report submitted to Government in September 2006. In its Report of 2010, they have observed that it was fair to compare 2G with 3G and recommended 3G prices to be adopted as current price of 2G spectrum in 1800 Mhz band. If these recommendations, which have not so far been accepted by the Government are taken into account, then the value of 2G spectrum allotted to the 122 new licensees and 35 Dual Technology licences would be much higher at about Rs 1,52,038 crores as against the amount actually received.

3. Many of the new UAS licensees of 2008 have been able to attract substantial amount of Foreign Direct Investment (FDI). Value of a new company with no experience in the Telecom sector can primarily be taken as that of the license and access to spectrum.

This would have been the prime consideration for foreign companies while infusing large amount of capital in the form of equity in these companies shortly after award of license. Based on this indicator, value of a pan India license works out between Rs 7,758 crores and Rs 9,100 crores as against Rs 1,658 crores priced by DoT. The total value for 122 new licences and 35 Dual Technology licences would be between Rs 58,000 to Rs 68,000 crores as against the actual revenue of Rs 12,386 crores realized.

Thus, on the values determined through various indicators, the presumptive value of 2G spectrum on account of grant of 157 licenses in different circles during 2007-08 would be in the range of approximately Rs 58,000 crores to Rs 1,52,038 crores.

(x) Value of additional spectrum allotted to 13 existing operators beyond contracted quantities

Spectrum was allotted by DoT to the existing operators beyond the contracted limits without imposing any upfront charge for such allotment. The value of spectrum held by 13 operators for 51 circles based on the 2001 rates worked out to Rs 2561 crores. Based on the above indicators, value would be in the range of Rs 12,000 crores and Rs 37,000 crores.

TRAI's recommendation (2010) for charging this additional quantity of spectrum has not been accepted by the Government so far.