SC goes overboard in its 2G order….it shouldn’t prescribe policies

In an order with many serious repercussions, the SC has ordered the cancellation of the 122 licenses that were doled out by Raja in 2008. There is nothing wrong in this per se. However, the court has gone overboard and into the area of the Executive (the government) by actually prescribing the policy the government should follow for spectrum allocations in the future. It’s insistence on auctions as the only way of distributing scarce natural resources is ill thought out and is frankly none of its business. The government must challenge this part of the order.

Yesterday, I refrained from writing on the SC order since the full implications of the order were not clear. Only the most superficial (the political ones) ones were visible. Most media reports called the order a “blow” to the government; an “indictment” of Chidambaram; and a “victory” for the anti-corruption activists. Today’s papers are a lot more circumspect. The repercussions of the order go farther and wider – and not all of them appear to be good…

One of the main parts of the SC order is the cancellation of the 122 licenses. It appears that the new players had all violated some or the other conditions of the policy. The fact that the SC has found lapses in the winners’ eligibility is itself an indictment of Raja –he and his ministry should have detected such violations and disallowed the companies from bidding in the first place. However, the SC order goes too far. It treats all types of errors as equal and prescribes the same stiff punishment of cancellation in all cases. The SC appears to have been motivated more by a desire to “teach the government a lesson” rather than being balanced. Surely cancellation is a drastic step and should have been ordered only in the worst cases? Surely the SC could have ordered other penalties – like levying a stiff fee for spectrum to be determined by an expert body – for some of the erring companies? It appears that the SC’s real grudge was against the First Come First Served (FCFS) policy of the Government; but it took its fury out on the new telcos instead. What about the older telcos who all benefited from the FCFS policy?

The second major part of the order relates to the rejection of the FCFS policy itself. Now the SC appears to be treading outside its turf in making this remark. In my view, the SC could rule that the way the FCFS policy was practiced was improper; that the process was designed to favor a few; that corruption was the end result. But the SC should have refrained from commenting on the merits of the policy itself. FCFS is a policy that has found favor in many sectors in India and in many countries worldwide. In the UK and US for example, the government chooses not to auction FM radio frequencies since the purpose of allocating frequencies is not to make money, but to ensure plurality of opinions. Sometimes it is necessary to let a financially weaker broadcaster get a license so that a divergent viewpoint may emerge. If everything is done by bidding, then it’s a policy that favors only the rich. It’s the government’s duty (and hence all political parties practice it – the NDA was the first one to promulgate the FCFS policy though its now distancing itself opportunistically) to protect the weaker sections and give them an equal chance at economic opportunities. FCFS needn’t mean arbitrariness and corruption. FCFS can be absolutely transparent if well designed. By rejecting FCFS as a policy in toto, the SC has gone way beyond its turf. It hasn’t even understood the implications of its own order. That is why the government must challenge the order.

The other part that is politically important is whether Chidambaram has been indicted or not. The BJP and in general, the opponents of this government, have raised victory slogans and demanded that not only Chidambaram, but even the PM resign as a result of the SC order. Why? What has the SC said about Chidambaram’s role? Why has it refrained from passing an order against Chidambaram?  “As the minister of C&IT was very much conscious of the fact that the finance secretary had objected to the allocation of 2G spectrum at the rates fixed in 2001, he did not consult the finance minister or the officers of the finance ministry,” the judgment has said. The judges have said all that they wanted to say. Will Justice Saini of the trial court heed this message? He ought to.

Most people are still confused about the way the telecom licensing works. There is one license fee – called the One Time Entry Fee – that grants a telecom license to a winner. This fee was set around 2003 at Rs 1651 crores. Does the SC order on “auctions” refer to this OTEF? That auctions should have determined who gets the license and what the OTEF should be? If that was the case, it would be OK since the OTEF is only a small component of the actual license fees. The license fees telcos pay for spectrum is different. Hitherto, spectrum has been free for 2G. In fact, some 4.2 MHz of spectrum came bundled with the payment of the OTEF. But if that were not to be the case, and if the spectrum were to be separated out from the OTEF, then could the spectrum be given to telcos in a transparent – yet non-auction based – manner? I have always believed that the spectrum is like many other scarce resources – and such resources cannot be left to the financial strong to enjoy. The poor should have as much access to the benefits of telephony as the rich. Telecom pricing needs to be kept low for this to happen. But all that’s set to change with this SC order. We’ve already seen telecom companies increase tariffs in the last 6 months. First there was a 20% increase last July, and now telcos are contemplating a further 20-30% increase. These increases have been necessitated because of high 3G license fees – and unfortunately 2G users are having to suffer. Imagine now if the 2G spectrum were also to be auctioned, as ordered by the SC, and the rates go sky high, what would happen to 2G pricing? In my view, depending on how high the auctions go, the prcing could become 3-5 times higher than at present. When that happens, the poor will exit the telecom revolution. Does the SC want the poor to be disempowered?

The blow that the SC order has dealt to the image of the country is yet another matter of concern. Foreign (and domestic) investors in the future will not be able to take the government’s word as final. Tomorrow, if the government announces a new policy on ports, and several billion dollars of investments flow in as a result of the policy, the investor will have to worry about the risk that the judiciary may overturn the policy several years later. This SC order is a severe blow to future investments in the country. If poor political governance was one factor for investors being wary of India, this SC order will be another reason.

The SC’s decision to punish telcos which “offloaded” parts of their equity to foreign partners after acquiring the license is ridiculous. Issuing fresh equity (offloading as the SC calls it) is the most common means of attracting investments. Foreign investors often invest in Indian companies that have acquired some assets. Foreign investors value these and pay a premium for investing. It was no different in telecom. The original bidders took the risk of entering a sector that was new to them. The foreign companies could have chosen to invest themselves if they wanted to take the risk. But they preferred to invest in companies after they acquired the licenses. So they paid a premium. But the original bidders didn’t make a profit. They only secured more investments for the company. This is the most common way for any promoter to seek investment. Getting investments is not the same as making profits. A recent story had indicated that the value of Uninor had dipped drastically since it began operations, and hence both partners – Unitech and Telenor – were losing their shirt. This is also normal. Returns take a long time in coming (Vodafone declared profits for the first time only recently). In many (a majority in fact) cases, there are no profits at all. So for the SC to suggest that offloading equity to outside partners and bringing the money into the company is the same as making profits – and penalizing the companies which did that – is too harsh.

The SC also made an observation that those who didn’t know anything about telecom jumped in to acquire telecom licenses. What’s wrong with that? What expertise did the Reliance group have in telecom before it got into the sector? What about the Birlas before they acquired Idea? What about the Tatas? If past knowledge is a precondition to entering telecom, then only foreign companies would qualify. Clearly, the SC has gone overboard.

There are many other parts of the SC order and these will no doubt be discussed threadbare in the next few weeks. But one thing is clear – the SC has gone too far. It’s reduced the powers of government in making policy. Just like it did when it ordered the cancellation of the policy of hiring Special Police Officers (SPOs) to fight the Maoists in Chhatisgarh. The government went in appeal against this order. The government must likewise challenge the present 2G order also.

The real truth is that the SC should not have commented on the policy of FCFS. The Judiciary has been accused of judicial activism several times. It is also accused of judicial outreach. This is clearly a case of that. By straying into the government’s domain, it has harmed the basic structure of governance prescribed by the Constitution…..