Monday, April 25, 2011

Wait a sec.....the 2G “scam” is only worth Rs 200 crores???

While everyone in media and opposition seems to be exulting with the naming of Kanimozhi in the 2G chargesheet yesterday, an important point seems to have been missed. After months of investigation, all that CBI is pinning on the DMK as corruption charges is Rs 200 crores or so. What happened to the accusation made by the CAG, media and others of this being the “mother of all scams”? Were those just inflated numbers put out to create sensational news?

Let’s take stock of what all has been found after months of investigations. The only case made out by the CBI so far.....where a money trail has been the link between DB Realty (which set up Swan Telecom) and the DMK party (via Kalaignar TV). In a transaction which looks clearly like a bribe to Raja/DMK for favors rendered, DB group transferred about Rs 200 crores to the party run Kalaigner TV. This is a charge which hasn’t been proved yet; but given the look and feel of it, my own mind tells me that the charge looks to be true. Clearly, Raja and the DMK were rewarded in cash for the out-of-turn allotment of license and spectrum to Swan Telecom.

The other link that has been charged (its still to be established) is of the Reliance ADA group’s involvement in Swan Telecom. If proved, it would establish that ADAG actually controlled Swan.....thus violating a DoT rule that a telecom operator cannot own more than one telecom license in one circle. It would appear that either Reliance wanted to control the telecom market better by having two companies while its competitors had only one; or it wanted to “trade” in the spectrum by selling it further to others. No case has been made out yet on the second possibility. I don’t think a case has been made out that Reliance profited from the spectrum. It looks like the motive was controlling the market. The charge against Reliance really is one of violation of the telecom rules. And no money trail has yet been established between Reliance and Raja/DMK.

There is still no money trail established in the case of Unitech (Uninor) and Raja/DMK, though Sanjay Chandra has been behind bars for so much time now. It’s surprising......given that Unitech was clearly also a beneficiary of Raja’s favors. Are we saying that Unitech is smarter than CBI.....that they have been able to keep the dirt so deep down that CBI has not been able to find it yet? All that CBI has been able to establish is that Unitech received favors out of turn.....not yet the mechanism of payment or indeed, even the amount of bribe money.

Likewise, there is no link established yet between the other beneficiaries like Datacom (Videocon), Loop Mobile etc and Raja/DMK. It is reported that CBI may file one or two more supplementary chargesheets involving these companies, but it appears that it is running out of steam. The bulk of the charges have been made. A few small ones remain.

The only other accusation made (though totally wrong and misunderstood by all) is that when the promoters of Swan and Unitech diluted their stakes in their companies by getting in foreign firms (Etisalat and Telenor respectively), they made a killing in the valuation of the company. These foreign companies came it a valuations of some Rs 8-10,000 crores each. It was thus claimed that Swan and Unitech promoters made thousands of crores each because their share of the company was valued so much higher. This is a wrong charge.....because neither DB owners nor Unitech owners actually “sold” any of their shares. All they did was “dilute” their shareholding by issuing new shares to their partners. Not a single paisa was taken out by these two. Yes, their valuation “on paper” went up many times over. These gains are ephemeral and cannot be called profits......because profits or losses are to be considered when the promoters actually exit the company ( which won’t happen for several years). If at that time, the two telecom companies are making losses (and most likely they will, given the crowded and competitive telecom market that exists in India), then the valuations will plummet and DB and Unitech will actually make losses. Let’s not forget most companies that are set up end up in losses. Besides, almost all joint venture partnerships work in this same manner. The foreign partner bring technology and capital to the deal; the local partner gets value in the form of licenses, business relationships, and expertise in handling local regulations. Most foreign companies dread the quagmire of laws that India has.....related to production to labor to taxation to licenses to what not. The Indian partner usually handles all this; Most joint ventures are structured like this. There is nothing unusual in all this. It’s not a scam.

That brings me to the original estimate of Rs 1.76 lac crores that the CAG and the media called the 2G “scam”. This was an unfounded charge. This was a political charge which was alright for the BJP to make.....but the media never even understood the matter....or it intentionally amplified for parochial gains. In fact, the government itself initially didn’t understand what was happening when this story first came out. In a series of missteps, the government started by denying the “charge”, putting up a weak defense and only much later accepting that it was a policy decision; not a scam. But it was too late by then. Poor Kapil Sibal and Montek Singh Ahluwalia weren’t even given a chance. The truth was that giving 2G spectrum cheap was a policy decision and the government should have defended it strongly. CAG was wrong in mixing up issues of “policy” and “procedures”. The policy is clearly in the domain of the government. The government considered telecom to be virtually an “essential” commodity and hence did not want to “maximize revenues”. Just like it doesn’t in the case of diesel, kerosene, fertilizers, power etc. The government was right. As has been totally proven, telecom has been the biggest revolution in this country. Directly as a result of the 2G revolution, so many of the underprivileged sections have been empowered; so many are now able to do business without even having a permanent shop/office; so many have raised themselves out of poverty as a result of this. None of this would have been possible if spectrum had been charged a high rate and consequently telecom prices were very high. If people believe that cheap 2G spectrum benefited the telecom companies, then that’s not true. Airtel, the biggest and most successful telco in India reports EBITDA margins of about 30%......a figure not unusual given the amount of capital deployed (the cost of which is captured below the EBITDA line. Its net profit margin is only about 19% or so). The 2nd biggest operator – Reliance Communications – is in losses. Almost all other telcos are making much smaller margins. The fact is that telcos did not benefit monetarily because of cheap spectrum......the people of this country did. A bulk of that Rs 1.76 lac crores is directly attributable to this policy the government followed. In fact, both the BJP and Congress governments thought this way. But in a country surcharged as it is right now with accusations of corruption being played up by media, who wants to understand the real truth???

The real truth is not that there was no corruption in the 2G licenses issue. There was. But it was only of the order of a few hundred or at most a thousand crores or so. Rs 200 crores has been identified now. Another few hundred crores may be unearthed in the months/years to come. Quite a big sum of money in its own right, but very small given the kind of accusations drummed up by the CAG. The rest of the charges were political in nature and sensationalized by media for its own TRP gains. The real truth also is that scams of this order can be found in virtually every single government deal.....Kalmadi’s corruption charges are likewise small change. Nothing close to the Rs 70,000 crore “scam” that it was made out to be. The real reasons for corruption in government are well known.....There is a need for nearly Rs 1 lac crores every five years to contest elections. Till a legal way is found to fund this need, corruption will not go away.....

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