Thursday, February 9, 2012

Bombay HC indicts Vilasrao Deshmukh – but doesn’t prescribe policy like SC did….

The SC recently ordered the cancellation of all the 121 2G frequencies that were allotted by Raja in 2008. It castigated Raja for the cavalier way in which he went about twisting policy to suit his greedy needs. In another order passed yesterday, the Bombay HC ordered the return of the 20 acres of land given by Vilasrao Deshmukh, then CM of Maharashtra at a throw-away price, to Subhash Ghai’s Whistling Woods in the year 2000. There are many similarities between the two judgments; and yet there are important differences too. And very importantly, there are warnings to governments of all parties….

Let’s take a look at the similarities first:

1)      In both cases, there were scarce resources involved. While 2G spectrum is well known today to be scarce, it is very well known to all who live in Mumbai that land is a highly scarce resource in this maximum city. In both cases, the real value is higher of the resource is than the value at which it was “allotted” or given away.
2)      In both cases, there was discretion involved in the decision making. Raja used his discretion (rather clumsily; so he got caught so quickly) to change the rules of the game at the last minute (advancing the date for submitting applications with DDs in hand) and Deshmukh used his discretion as CM to push the concerned bureaucrat in the government to giving the land cheap.
3)      In both cases, the judiciary stepped in to cancel the deals.
4)      The courts are getting very ruthless – one can imagine the losses to the telecom licensees who put in so much infrastructure; as well as to Subhash Ghai who must have put in many crores to set up this rather nice place.

Now let’s look at the major differences:

1)      In the case of the 2G allocation, there was a government policy to give spectrum free. The policy – at least on paper – was applicable equally to all players of the telecom sector. In the case of the land allotted in Mumbai, there was no policy as such. It was a one-off deal done expressly done for Whistling Woods. Had there been a policy of the Maharashtra government to encourage arts and films etc, and provide land for such efforts, then the two cases would have been similar.
2)      While the state exchequer lost revenues in both cases, there was no quid-pro-quo for Deshmukh. Likewise, in the Antrix deal, there doesn’t appear to have been any quid-pro-quo for the ISRO scientists; nor for Chidambaram for his role in the free spectrum decision (that’s what the trial court said). Deshmukh will not be prosecuted; just as the scientists and Chidambaram won’t be prosecuted. In the case of Raja, the trial court did find prima facie evidence of a quid-pro-quo and that’s why he is in jail. Many readers believe that Raja’s being in jail proves that the courts have not taken kindly to the free-spectrum policy; or that the SC has canceled the licenses because of the free-spectrum given. That’s untrue – the reason for both is that there was a problem in the way a few licensees were preferred, not because the spectrum was given free. That judgment is still pending.
3)      The big difference however is that the Bombay HC only canceled the land allocation and put financial penalties on Subhash Ghai – return of the land; and payment of steep rentals for the portions he used. The Bombay HC was also a lot more practical in the deadlines it set. It allowed Whistling Woods to keep 5.5 acres of land until 2014 when the current batch of students would finish their course. It didn’t want to harm the interests of those who trusted Whistling Woods and joined up. The important point is that all penalties were financial and there was no collateral damage. There was also no attempt to prescribe what the government should do next. It did not say that the Maharashtra government should necessarily auction the plot of land (even though that’s what governments usually do in Maharashtra). The Maharashtra government may make a new policy to encourage films and set aside a large chunk of land for all film studios and production companies, and if the rules are transparent and fair, the court would probably be ok with it. At least the court did not prevent the government from developing a policy as it deemed fit. The court did not step into policy making.

However, in the case of the 2G spectrum allocation matter, the SC went into the domain of the government and actually prescribed the policy – specifying that the government “shall” (in legal terms, this is an order that HAS to be complied with) auction the spectrum. Frankly I have written earlier – and there is an emerging view amongst financial commentators, lawyers and government officials that agrees with me – that the SC has gone overboard in actually prescribing the auction (Feb 4th: SC goes overboard in its 2G order….it shouldn’t prescribe policies). Had it not ordered auctions, but just instructed the government to develop an appropriate, transparent policy, that would have been perfect.

As a result of these two judgments, there are bound to be questions asked by investors about the sanctity of government decisions. The government’s decision clearly isn’t enough to go by any longer. In the future, even if the government formulates a policy that permits something, investors will have to get it legally examined first and provide for the risk of the policy getting reversed. In other words, governments cannot be trusted any longer. Maybe the Tatas shouldn’t have jumped with joy at Modi’s land allocation (allegedly at very cheap rates) in Sanand; instead they should have been circumspect and got it legally verified. It is possible ten years later that some court may order the Tatas to return the land! These kinds of judgments are bound to affect the investment climate in the country.

In any case, one thing is clear. The courts are becoming more and more intolerant of governmental actions and inactions. The Gujarat High Court’s indictment of Modi for “inaction and negligence” during the 2002 Godhra riots was also a hard hitting one. The courts don’t care for which political party is in power. They are focused on the job on hand – cleansing the muck that governments sometimes create….

The real truth is that the days of political randomness and casual discretion are getting over. Governments can hardly afford to be casual about governance. There is a big daddy watchdog called the judiciary that is there to hound cavalier governments. As long as the judiciary doesn’t get into policy making itself, this balance between the Executive, Legislature and Judiciary is good for our democracy….

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