Maybe CBI should investigate the CAG now…..

This story has been brewing for a few days now. The CAG appears to have played a political game by calling the 2G scam a Rs 1.76 lac crore scam. The illogic of this estimate was obvious to anyone with even an iota of intelligence right from the beginning; but the CAG being a Constitutional body – no one usually doubts it for intellectual honesty. It’s now however becoming clear that the CAG has played a game….and it has many questions to answer. Why and under what circumstances did the CAG ignore the estimate of loss of its own team member, the Lead Investigator of the 2G scam? Why did the CAG choose to sensationalize the scam by putting out a much larger figure? Why has it chosen sensationalism over conservatism – a hallmark of all auditors?

The news report I am referring to has been featured prominently on the front page by Indian Express today. Before taking any political sides, it is worth reading the story objectively once. The Director General of Audit (Post and Telecommunications) RP Singh – the person who actually conducted the probe on the 2G scam – had been wary of estimating “notional” or “presumptive” losses. When he finally put out a figure, that figure was a mere Rs 2500 crores. However, this number was unacceptable to Vinod Rai – the CAG – for reasons that he must explain now. Vinod Rai inflated the Chief Auditor’s estimates by 70 times to Rs 1.76 lac crores. And although he also gave two other lower estimates, he knew very well that the higher number would be picked up by the media and it would stick in the minds of people. What was his motivation to play this political game?

This is not the end of the story. In line with procedure, the DG (Post & Telecommunications) wrote to the Secretary, Department of Telecom (on July 19, 2010) to respond to the observations made in the report. Apparently, the Secretary DoT responded with a preliminary reply stating that the files of the ministry were with the CBI and he would be able to respond fully only after the files were returned or some such thing. Thereafter the new Secretary, DoT responded with the revised replies (on September 21, 2010). Upon receiving these replies from DoT, the DG forwarded them to CAG Vinod Rai and the Deputy CAG Rekha Gupta for “perusal and necessary action”. As per process, the DoT’s replies have to be taken on record and their observations play an important role in explaining the observations made by the Audit team and arriving at any estimates if required. The DoT’s reply is a critical input in writing the final report. Look at what happened here. The CAG was obviously upset that the DG had written to the Secretary DoT. Why? The CAG needs to answer why he didn’t want process to be followed. The CAG made his mind clear when he wrote “I wish we had not written to the DoT”. Really? Why should the auditor not have written to the DoT – the department that was being investigated? Why was the CAG interested in filing its report without getting the final response back from the department being investigated? Which audit process allows this? Worse, his deputy, Rekha Gupta chose to amplify her boss’s observation by writing “Please convey CAG’s observations to DG (Singh). Also please re-iterate he is not to write to Secretary DOT on this or any other issue for the present”. Wow. Penalize the smaller officer for following the process. Two bosses more interested in playing politics than in arriving at the truth. Shameful.

RP Singh has now retired. He has confirmed the dates of the above events, though he’s refused to be drawn into any controversy over the same. He’s also mentioned that by the time the new DoT Secretary’s reply came (the revised reply), the CAG had already finalized its explosive report. In other words, the reply was not considered. What kind of a CAG is this? Indian Express has published a picture of the letter with the CAG’s observations.

It’s worth looking at the final three figures put out by the CAG in its report. All of them are specious methods of estimating the notional loss to the exchequer.

The first method is based on an offer made by S Tel for a pan-India license to the Prime Minister. S Tel was one of the applicants and it may have been anxious to acquire spectrum ahead of the others. No other applicant made such an offer. As such, there was no provision for any such open offer being made. And why was the offer made to the PM? The government policy was to give spectrum fee and charge entry fees based on 2001 figures. Such open offers have no sanctity in the government system. In any case, the offer was later withdrawn by S Tel. CAG has estimated the value of the new license based on this flawed method at Rs 65,909 crores.

The second method used was the one that has drawn the max attention – using 3G pricing to estimate value of 2G spectrum. This was based on a recco by TRAI (in 2010 – not in 2008 when the Licenses were issued) that 2G and 3G could be compared. This recco has rightly not been accepted by the Government. Even then, CAG has found merit in using this method. Everyone knows that 3G spectrum is used for premium “data” services. The objective of 3G spectrum is not to enhance teledensity but to provide premium services to those who need data on the move. The CAG’s view is like saying that a flat in Bombay is valued only on the basis of its size and it does not matter where it is located – in upscale

Napean Sea Road

or in far away Virar! The two are to be valued identically. After all, a flat is a flat and spectrum is spectrum!

The third method used was to look at the stake sale that new licensees undertook to their foreign partners. The CAG has used the “dilution of equity” by DB Realty and Unitech to imply that they made “massive profits”. Since this is a technical point, most lay readers do not understand the matter very well. “Diluting” equity is not the same as “selling” equity. Let me clarify. Diluting equity means issuing fresh equity. The company issues the fresh equity and the foreign company “buys” the fresh equity. Where does the money go? Into the company. Did Unitech or DB get even a single paisa for the dilution? No. Did they make any profits? Obviously not. What will the company do with the money? The company (which became a joint venture) will spend the money in rolling out the network, acquiring customers, advertising, building distribution….in short in running the business. Like every business, this one may or may not succeed. Most businesses don’t succeed. We know today that most, if not all, new licensees are losing money hand over fist. In all probabilties, these two will not make money for at least the next 10ears for sure. Why, an early operator like Vodafone just declared its first profit this year. What if Unitech and DB want to exit the company today so as to realize profit? Firstly, such joint ventures usually have lock-in clauses. Secondly, even if they do exit now, they will most likely make a loss. Their original investment will be sunk. This is basic level understanding that any student of commerce has. But for a politically minded CAG, obfuscation of truth was an acceptable way of work. But why?

The real truth is slowly but surely coming out. First truth: Spectrum sale for free was a great policy. It has helped bring telephony to the poorest of the poor and has transformed their lives. Second truth: The policy was rightly continued in 2008. Teledensity in January 2008 was still pretty low – there were just 275 million mobile phones then compared to some 750 million now. The poor have come into the revolution the last – and had the licenses been auctioned in 2008, the spread would have been far far lower. Third truth: Chidambaram was wrong in wanting to auction the licenses. He may have been tempted to do so for reasons of raising government revenues; but given the larger teledensity objective, he was wrong. Fourth truth: The entire cabinet took the decision to give spectrum free. It overruled Chidambaram. They cannot act coy about this decision Fifth truth: Raja surely appears to have indulged in wrong-doing. Like a petty thief (only in this case, the theft wasn’t petty!), he changed the rules of the game to favor a few. For this, he is being tried in the trial court. Sixth truth: Raja is in jail because of the DB-Kalaignar Rs 200 crore linkage; not because of the policy of giving 2G spectrum free. And lastly, rather than the word “scam” following the word 2G, it should be the word “revolution” that should follow. Enough politics has already been played. Let’s not play it any more…..

(PS: as more of the truth unveils, the CBI has stated that Videocon is in the clean…..)