Monday, July 25, 2011

Ridiculous.....yesterday’s debate on 2G makes no sense.....

Since The Real Truth started about 7 months back with a story on the 2G “scam” (I dont like to call it that), yesterday’s court-room drama by Raja and then the plethora of TV shows last night compel me to write a piece that tries once again to explain the real issues involved here. When I look at the issue after so much time having passed, I can vouch with near certainty that the issue is almost entirely a political issue. From an economic point of view, there is hardly any basis for the allegations being hurled by the NDA at the UPA. Sure, there has been corruption (not proven; but quite apparent) and Raja looks guilty of complicity, but the corruption is at a much smaller level than has been made to appear so far.

Before I start, let me state here that I don’t belong to the Congress or to any political party. I have no politicians in my family. I have no friends who are politicians. I have no family members working in the telcom business. Net Net, I have zero stake personally in this discussion.....Now let me analyze and look at each charge separately and closely:

1)      That 2G spectrum was given away cheaply: This is the main charge. We need to start by understanding the meaning of the word “cheap”. In my understanding, the charge would have been correct if the telecom companies which got the spectrum “cheap” had earned tons of profits. That would have meant that the government could have earned more from the spectrum. However, in this case, none of the telcos have earned profits that any normal enterprise would not expect to earn. Airtel’s EBITDA margin is around 30%, which is really par for the course for a company that has huge capex spendings. The #2 telco, Vodafone declared profits for the first time only this year after being in this business for more than 15 years. And what profit? Just a hundred crores or so. Idea’s EBITDA margin is under 20% and Reliance lost money last year before reporting a small profit this year. So if the telcos have not profited from the “cheap” spectrum, who has? The answer is obvious to those who want to see it. The Indian public. Because of intense competition, telcos were compelled to pass on lower prices to the public. Everyone knows that Indian telecom pricing is the lowest in the world. How would this pricing have been possible if it had not been for the “cheap” spectrum. It is entirely a result of these low prices that the telecom revolution happened in the country. India is an extremely price sensitive market and products priced high simply don’t penetrate the market deep enough. Look at any of our consumer products companies. The highest selling items are the cheapest ones. And even those will usually sell smaller quantities than local or regional ones that sell even cheaper. So the real beneficiaries of the “cheap” spectrum have been the people of India. Those who do not believe this should look at 3G pricing. I have a 3G connection and the monthly outflow is some Rs 1000 or so. In contrast, the ARPU for 2G services is some Rs 120 or so. Most prepaid 2G subscribers have balances of less than Rs 20 at any point in time. But why did successive governments offer spectrum so “cheap”? Clearly offering spectrum “cheap” was a matter of policy. It’s like the government’s policy of supplying kerosene and LPG cheap. It is supposed to help the poor. The governments (both NDA and UPA) offered spectrum cheap so as to encourage the telecom revolution. Both used to rush to claim credit for the revolution when it was still being considered as one of the biggest revolutions of India; now both want to blame the other. The fact is that both should claim credit for the way telecom has made an impact on the lives of people. The underprivileged poor, who don’t even have homes to live in, can today conduct business with dignity because they have a “number” where their customers can reach them. Our lives have improved a thousand times because every single service provider is a mere phone call away. It’s time we cut the crap and looked at the issues with at least a small amount of intelligence.
2)      That new licensees “sold” off their licenses for huge profits: I blame media for not explaining to their readers and viewers how corporates work. There is a primary difference between “selling off” and “diluting”. Selling off means that a promoter sells his shares to someone and “takes home” the profits if any. The money actually goes into the seller’s bank account. If that happened, yes it would be a sell-off. But diluting is a different thing. It means new shares are issued. The buyer becomes a partner in the venture. This is the way all joint ventures are signed. In this case, the original promoters (Unitech; Swan) got nothing to take home. No money flowed into their accounts. There is no “buyer” and there is no “seller” in that sense. The “buyer” has put his money into the company. The company’s equity and cash position swells. What does the company do with all this cash? It invests. Invests in building the infrastructure. Does building infrastructure lead to instant profits? Every businessman hopes so; but in most cases, unfortunately, it doesn’t happen that way. It will take decades for Telenor and Etisalat to make money on their telecom businesses in India. There is so much competition; and these brands have come in so late. They cannot match the infrastructure already built up by Airtel, Voda, Idea and Reliance. Today’s story in Business Standard brings out this point very clearly. The question then is why these companies so desperately want to come to India. The answer is that they see India as a long term play. As a country where they “just have to be present”. Anyone who doesn’t understand this should just shut up. That includes pretty much includes all of the BJP leaders. And much of the media as well.....people who cannot even understand the difference between assets and liabilities. So I am sorry, but diluting equity is not corruption. And the PM and Finance Minister have nothing to worry on this count. They approved it and they did the right thing by approving the dilution.
3)      Licenses were sold off: The government’s policies with respect to licenses have always been clear. Licenses belong to the government and they cannot be sold off. Licenses are only leased to the operator. Once the license period ends, the license reverts back to the government. The government may decide to extend the lease period for a consideration; or it may decide not to. It’s the same with spectrum. It belongs to the government. So license and spectrum are never “sold off”. What can be sold off is the equity in a company that has been granted the license and the spectrum. As we have seen in point 2 above, even that has not happened.
4)      The UPA gave 2G spectrum away without auctions: This is utter rubbish. As we now know, this decision was taken by the NDA government in 2003. Arun Shourie (NDA) has also given away several licenses without auctions. The BJP is just playing dirty and silly by bringing this up.
5)      There were process violations during Raja’s tenure: Most likely there were. When some corporates were favored over others; when some corporates were ready with Demand Drafts in a few minutes after the date for submission was advanced; these are all signs of Raja twisting the rules to earn the kickbacks. This is surely a case of a scam. This is what the Supreme Court is looking into. This is what CBI has charged Raja with.....taking Rs 200 crores from DB Realty (still has to be proven). Incidentally, there is still no case made out against Unitech at all. Sanjay Chandra is being held in jail only because of the public anger in the 2G matter. Like I mentioned in point 2, dilution of equity is being misunderstood for profit-booking.
6)      Reliance Infocomm was a front for Swan: Yes it looks that way. And clearly if this is true, then either Reliance was extremely savvy in the way in which the companies were structured (they are experts in this). Or Raja knew of it and allowed it to go on. Or both. In the first case, it’s a debatable point. Every corporate veers around complex laws by designing “innovative” structures. In each case, the letter of the law is followed, but the spirit is violated. Is this a crime? I don’t know the answer to that. If Raja was aware, then surely, this is a scam. And must be probed.
7)      Unitech and DB Realty were not eligible for the licenses: I don’t know if they were eligible or not, but if this is true, then take the licenses back. And yes, this would be a valid corruption charge.
8)      Many new licensees have not rolled out their networks as committed: It’s simple. Take the licenses back. Where’s the scam here???

The real truth? Corruption was there in the 2G matter – but in limited pockets and in limited quantities. Why is this surprising at all? I am willing to go so far as to say that corruption exists in most government deals. It doesn’t matter whether the NDA is ruling or the UPA. But there is a difference between corruption and policy concessions. The CAG blundered by failing to realize this.....or by intentionally sensationalizing the matter. Today, challenging the CAG report is considered harakiri. Anyone who points a finger at the CAG is considered to be an involved party. Likewise, and understandably, the BJP has made a political issue out of 2G and has succeeded to some extent in tagging the Congress as the “most corrupt government”. This is ridiculous – at least this cannot be surmized basis the 2G case. If there are other cases to go by, I don’t know. Like I said at the beginning, I don’t carry their brief.....

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