2G scam, Spectrum reframing, Sistema controversy,Allocation of Natural Resources explained1. What is Spectrum?2. Method #1: First come First Serve basis3. Method#2: Auctioning method4. What happened in 2G scam?5. Swan Telecom(Shahid Balwa)6. Unitech (Sanjay Chandra)7. A.Raja (Telecom Ministry)8. Kanimozhi9. Neera Radia10. CAG: 1.7 lakh crore loss11. Supreme Court verdict12. Presidential reference on SC verdict13. Supreme court on Presidential Reference14. Impact of License Cancellation by Supreme Court15. Sistema Russia issue16. Spectrum RefarmingContinuing the series of technically not-so-correct articles on economy.What is Spectrum? Whenever you watch TV, receive phone call, send SMS, surf internet.data is being transferred from one place to another, say Ahmedabad to Mumbai. So, If data was a truck, how would you transport it from Abad to Mumbai (or vice versa)? Obviously via highway. Spectrum is that highway.Based on the width of the highways, we classify them into followingCable TV145-860MHz

2G800-1900MHz

3G2100MHz

4G, broadband internet2300MHz

(^numbers for illustration only. Different websites will give different numbers.)

So, We first send the truck from Abad to a Satellite hovering in the sky, and from there, send the truck to Mumbai. Problem: satellite=expensive. Private Player(Businessman) cannot afford it. Solution: Government launches the satellite using ISRO. Thus the highway (spectrum), is created. Then Government will charge money to whoever(cellphone company) uses this highway (spectrum). Youre a businessman, you want to launch your own mobile service (like Vodafone, Airtel etc). Therefore youre interested in using this 2G highway, to transport your trucks (data). You can also use 3G or 4G, which provide faster data transfer, but theyre more expensive.New Problem: to access this 2G highway, you need two thingsProblem (businessmans side)Solution

1. Drivers License (to operate the truck)Apply to Department of Telecom.

1. Pay rent/toll for using this highway (spectrum). Just like you pay for using Bandra-Worli sea-link or Yamuna Expressway.Get loan from SBI.Pay the money to Government. Or even better, bribe minister so they give free spectrum.

Highways have fixed capacity. So Government cannot give license to 500000 truck-drivers else, itll create traffic jam. So, From Governments side what should be the ideal solution?1. Check the application of driver: does he have previous experience of running telecom business? and more importantly his class 10,12 and college marksheets and school leaving certificate.2. After verifying his record, Sell the access to this highway (Spectrum).Another problem: how should Government sell access to this Highway (Spectrum)?Ans. Two methods, 1) first come first serve 2) Auction.Both have their advantages and problems.Method #1: First come First Serve basis You already know how cinema tickets are sold. The person who is first in the line, gets the ticket. If You come late, you dont get the ticket. This also leads to ticket black-marketeering, for example, I come early, buy all the tickets. You come late, all the tickets are sold, I offermytickets to you @higher price and make huge profit. This is not good for economy because Im making money without producing any new goods/services=inflation. But according to a theory propounded by Mr.Sibbal, this is zero loss. Because Cinema hall did receive money for ticket sale. So its not like Cinema-hall making losses!anyways, for common men:1. Buying ticket=not crime.2. Buying ticket but not watching movie AND selling that ticket to third person @higher price=crime.Method#2: Auctioning method As the name suggest, Auction the tickets. If person A offers Rs.200 for a seat and Person B offers Rs. 500 for the same seat, then sell the ticket to Person B. From theatre owner (Govt)s point of view: this method may look good, because now we can earn more money per ticket sold and use that money to finance whatever Development scheme weve in our mind. Here is the problem: if Person B was a doctor, and he had to shell out Rs.500 for one movie ticket. Then he may charge more fees from patients @his clinic to keep the profit margin same. So overall effect on economy= may not be good.What happened in 2G scam?Recall that you needed two things to run telecom business1. Drivers license2. Access to Spectrum (via paying the money to Government)Government decided that1. We will give license by First come first serve basis.2. To get this license, youll have to apply before 1stOctober 2007 and pay money (Entry Fees) for license.3. And whoever gets the license, he will automatically get spectrum for free. So no need to pay separate money for accessing highway(spectrum). This is known as Spectrum linked with License.4. If we give you the licence (+spectrum), then youll have tocover 10 per cent district headquarters within the first year of the allotment (i.e. you start serving customers in that area). This is known as Roll out Obligation.And then, what happened next, is a classic case of cinema ticket black-marketeering.Swan Telecom(Shahid Balwa) A new company, it had no experience of running telecom business. Yet it applied for license and got it. (officially) SWAN telecom paid aboutRs.1,500 croresto Government, as 2G Spectrum License fees. But this company did not open a single outlet/mobile tower. So it didnot meet the Roll out Obligation. It simply sold 45% stakes to UAEs Etisalat for around6000 crore rupees. Calculate the profit%. Shahid Balwa was arrested in 2011, released on bail, thus proving that he is totally awesome. His argument in the court, Since Mr Sibal and the PM have both said that there was no loss to the government from the allcoation of licenses in 2008, so Im being wrongly accused of corruption and conspiracy.Unitech (Sanjay Chandra) This company didnot have any prior experiance of telecom business. Yet, Applied for license, paid $365 million as licence fee to Government. Did not open any outlet/mobile tower. Then sold 60% stakes to Norways Talenor for $1.36 billion= huge profit without doing anything. Thus name of company changes: Unitech+Talenor=Uninor. Recall: bought the ticket, did not watch the movie and sold the ticket to third party @higher price.A.Raja (Telecom Ministry) Ignored the advice of PM, Finance Ministry, Law ministry, TRAI etc. TRAI had advice Raja to sell the spectrum via auctioning. But Raja used first come first serve basis. Licenses were sold in 2008 but the price (entry fees) were kept very low @2001s market rates. Initially the last date to apply for licenses = 1stOctober 2007. But then Raja changed policy well give license to only those companies who applied before 25thSept. This way later-comers could not get license (and had to buy it from black market). He allowed ineligible companies to apply and get license (e.g. Unitech) The companies who got license but did not start business (UNITECH and SWAN)Raja did not take action against them. He should have cancelled their licenses or imposed heavy fines on them. Companies paid him the bribes, he transferred money to bank accounts under his wifes name in Mauritius and Seychelles. Arrested in 2011, got bail in 2012, came back in parliament, thus proving that he is totally (and that means totally) awesome.Kanimozhi DMK MP, Daughter of Karunanidhi. Shahid Balwa (SWAN) got benefit because of Raja. So he had to pay the bribe. He transferred Rs.200 crores to Kalaignar TV channel, which is owned by Kanimozhi and her step mom Dayalu Amma and other family members. Arrested in 2011, got bail in 2012, came back in parliament, thus proving that she too, is totally awesome.

Neera Radia There are some phone-tapes, in which this lady is talking with Barkha Dutt (NDTV fame). To put this bluntly, Radia allegedly paid money to Congress party, to get Raja appointed as telecom minister. Then Raja could use the office to benefit particular companies in 2G auction (who had financed his posting). This phone scandal is known as Radia Gate. Only questioned, not arrested, and it is said that she wore a Kashmiri shawl worth Rs.1 lakh during questioning by Enforcement Directorate, so she too is totally awesome. Now thatshawl has become so recognisable that Kashmiri shawl sellers have started referring to it as the Radia shawl and sales of it have shot up= good for economy, GDP increased.

There are some other players too- RK Chandolia, Siddharth Behura et al, but you get the idea- they too are totally awesome.CAG: 1.7 lakh crore loss The 122 2G licenses were given by Raja for over Rs 9,000 crore. While 3G auctions for a smaller number of licenses had fetched the government a sum of Rs 69,000 crore. Therefore Government has lost money (Besides, whatever money made by ticket black-marketeers, is loss to the cinema hall owner) The question remains, how much money was lost? CAG says Government lost Rs.1.76 lakh crores, it has come to this figure, using extrapolations from1. licenses were sold in 2008, @the MRP of 20012. The moneyreceived from3G auction vs the money recieved from 2G license.3. 2G Spectrum was allotted for free. (recall Government only asked for entry-fees for licenses. Spectrum was linked with License). 2G-Spectrum should have been auctioned.4. Profit made by Swan and Unitech etc. through black-marketeering.

Parliament -JPCIn Feb-2011, Parliament Constituted a Joint parliamentary Committee to probe the 2G scam. No real progress so far.Supreme Court verdict Subramanian Swami, filled a petition in Supreme court, regarding the irregularities in 2G Auction. The case went on, finally in Feb 2012, The Supreme Court cancelled 122 licenses issued in 2008, by A Raja when he was Telecom Minister. Supreme Court said, these licenses were granted in an arbitrary and unconstitutional manner. SC asked the Telecom Regulatory Authority of India (TRAI) to recommend a new process of allocation of licenses, along with guidelines for an auction of spectrum. Supreme Court has also ordered Government to finish the auctioning before Jan-2013.Presidential reference on SC verdict After above verdict of Supreme court, Government decided to get clarification, on whether should every natural resources (coal, gas, petroleum, water etc) be allotted through auction only. (although technically Spectrum is not a natural resource, it is generated because of man made satellites.) But, Mohan cannot just call any SC judge and seek clarification. A procedure has to be followed. Through Article 143 of the Indian constitution, the president can refer matters of public interest to the Supreme Court and seek their opinion. This is known as Presidential Reference. Here, first the Cabinet headed by Mohan approves a resolution that WE need to send presidential reference in this xyz matter. Letter goes to President of India, then he/she sends a new letter to Supreme court asking what should be done in this XYZ matter?Supreme court on Presidential Reference Supreme court said auction cannot be the only method of allocating natural resources, it should be considered on a case-by-case basis. Earning maximum revenue is secondary to serving the public good in allocating naturalresources. But if allocation of a particular resource is going to get sudden huge profit to a company, then such resource should be allotted through auction only. (for example 2G spectrum). In anycase, all decisions and actions of the government are open to being questioned by the court.Apart from that, a committee on allocation of natural resources, headed by Ashok Chawla, also recommended the adoption of a transparent and competitive process for the allocation of natural resources.Impact of License Cancellation by Supreme CourtCustomers Since the license are scrapped, and new auction will be held = input cost of mobile companies will increase. So, Theyll increase the call-rates to keep the profit margin same. Therefore final consumer (common men) become the innocent victim in this game.Foreign Investors Norways Talenor and UAEs Etisalat Company had paid heavy price to invest in the telecom sector of India. But since the licenses are cancelled, in future, the foreign investors will be extremely cautious before investing in India, particularly in the sectors related with allocation of spectrum, coal mines etc.Government The reputation of Government =already down. So in terms of reputation theyve got nothing to lose. They make excuse that 1) 2G =Zero loss. 2) Since licenses were not auctioned = companies got them cheap = call rates were cheaper = publicbenefitedfrom this. Congi Government also maintains that we merely followed the policy of NDA (BJP), i.e. spectrum was linked with license and first-come-first serve basis. So, if our seniors did brutal ragging on us in the hostel, then we too will continue the glorious tradition by brutally ragging our juniors. Anyway nobody is a saint when it comes to allotment of land, coal reserves, spectrum etc be it congress, BJP, state Government, union Government. because everybody needs truckload of cash to finance election campaigns. Now Government will auction some 2G spectrum in Nov 2012 and expects to earn around Rs.40,000 crores. And this money could be used to solve thefiscal deficit problem (click me)or tofinanceany new Government schemes for poor people.Banks SBI, PNB and other banks had landed to some of those telecom companies and now licenses are cancelled, so loan-money is stuck. Anyways, nothing new for SBI- their loan-money is stuck with Vijay Mallya (Kingfisher) also.Innocent aspirants of competitive exams Theyve to prepare one more stupid topic for exams/group discussion /interview. Anyways, nothing new for them either, theyre used to this irony of life.Sistema Russia issue Just like Telenor (Norway) and Etilsat (UAE), Sistema (Russia) is also a foreign telecom company. Sistema had bought stakes in an India company (Shyam Telecom), but then Supreme court cancelled their license. Now Sistema has appealed the Supreme court to restore its license, current matter is pending in court. In the light of this event, Russian Government has warned India that1. If the issue of cancellation of 2G license to Sistema is not resolved in Indian courts, we will go for international arbitration. (because Russian Government too holds about 17% in this Sistema-Shyam telecom company.)2. Row over Sistema will have great repercussion not only on Indo-Russian bilateral cooperation but also for foreign investments in India.3. We will not let Sistemas USD 3.1 billion investment in its Indian telecom venture go waste due to internal problems here.

Spectrum Refarming This is a separate issue, not directly associated with 2G Scam of A.Raja. In 2001, some companies got License + free spectrum (900 Mhz). (recall that Spectrum was linked with the license.) Theyve to renew their license in 2014. But now Government has changed policy. According to new policy, Spectrum is de-linked from License. So youve to apply for licenseseparatelyand you have to purchase spectrum separately (through auction). Telecom Regulatory Authority of India (Trai) has suggested that existing mobile operators will have to surrender the spectrum in the 900 Mhz band at the time of license renewal in 2014. And then, this 900 Mhz spectrum will be auctioned again. Under this so called Spectrum-refarming process, if the companies manage to win in the auctions, they will be able to retain the spectrum or, in lieu, they would be given the 1,800 MHz spectrum via another auction. Telecom companies are against this decision. Their argument, weve already invested more than one lakh crore rupees in machinery, mobile tower, other infrastructure for 900Mhz spectrum. If you take this away and give us new type of spectrum, well have to buy new machines=well increase call rate price to cover the losses. The matter will now be decided by Empowered group of ministers (EGoM).