17 November 2010

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Part Two – understand the CAG Report on 2G Spectrum Scam in depth Don’t Forget its your money Scam Amount 1.76 lakh crores

Part Two – understand the [Comptroller and Auditor General of India]
CAG Report on 2G Spectrum Scam in depth don’t Forget it’s your money Scam Amount 1.76 lakh crores

1.The audit was conducted during January 2010 to September 2010 covering the period from 2003-04 to 2009-10.

The audit covered the implementation of policy for Unified Access Licensing Regime and allocation procedure for 2G spectrum to new as well as existing operators under the UAS.

2.The audit was conducted on the basis of records/information to the extent made available by the DoT, and the related files of the DoT seized by the CBI in October 2009 made available to Audit.

The relevant files produced by the Ministry of Finance (MoF) were also examined before finalizing the audit comments.

3.Audit also accessed public documents available on the website of the Ministry of Corporate Affairs to confirm the compliance of licensee companies to the conditions of UASL Guidelines and the provisions of the Companies Act.

4.The Report takes into account, the replies by the DoT and the MoF in response to the audit observations communicated to them in July 2010 and September 2010.

5.As per the Performance Audit guidelines, Entry and Exit Conferences were held on 23 December 2009 and 20 May 2010 respectively.

The DoT sought a further meeting with Audit to discuss the draft audit Report.

The meeting was held on 4 October 2010. This Report takes into account the discussions between audit team led by the Deputy Comptroller and Auditor General and the DoT team led by Advisor (Finance).

6.The DoT's action of applying the rates approved for the existing operators for migrating to UAS regime, to new applicants also by relying on the clarification of the Chairman TRAI in his individual capacity was inconsistent with the recommendations of the TRAI (2003) and went beyond the authority given by the Cabinet.

It also violated all canons of financial propriety. The DoT had to resort to informal clarifications from TRAI before concluding that new applications would also be at the entry fee of price determined for 4th CMSP in 2001 as against TRAIs recommendation of introducing new operators in the existing regime through a multi-stage bidding process.

Elimination of bidding process without delinking licensing from spectrum was not intended by TRAI.

7.The decision to continue to charge entry fee at 2001 level even from the new licensees under UAS regime in 2003, was thus not deliberated either in the TRAI or Telecom Commission or GoM or Cabinet.

8.spectrum pricing issue was to be decided in consultation with the MoF.

However, when a GoM was constituted in February 2006, its Terms of Reference (ToR) were modified at the instance of the DoT to keep the issue of spectrum pricing outside its purview.

Though MoF insisted for its inclusion in the ToR for the GoM, DoT maintained that 'spectrum pricing was within the normal work carried out by them'.
The MoF opined that spectrum pricing was an issue which has far reaching consequences for the economy and needed to be debated, but this was not considered at the highest level and the views of the DoT prevailed in finalization of ToR.

The GoM's role, in December 2006, at the instance of the DoT, was confined to issues concerning ‘spectrum vacation’.

Thus, without MoF getting a chance to contribute to the issue of pricing of spectrum, new licences continued to be issued along with the spectrum.

9.It was also noted that the DoT kept the applications for UAS licence pending since March 2006 on the grounds of non-availability of spectrum, though a decision to get the spectrum vacated from MoD was taken way back in 2003.

DoT admitted that prior to April 2007, availability of spectrum was not quantified and GSM spectrum allotments to service providers/operators were made after due co-ordination with MoD on a case to case basis.

Since the availability of spectrum had not been quantified till April 2007, the basis for keeping the applications pending and seeking TRAI recommendation (April 2007) on limiting the number of Access Service Providers on the grounds of non-availability of spectrum is inexplicable.

10.in August 2007, TRAI in its report observed that the entry fee as it existed in 2001 was not a realistic price for obtaining a licence in the changed situation considering the dynamism and growth of telecom sector and it needs to be reassessed through a market mechanism

11.the DoT should not have lost sight of the need for a realistic price for 2G spectrum, especially in the light of the fact that the price being charged was discovered from a nascent telecom market in the year 2001 and was approved by the Government as benchmark only for the purpose of allowing migration of Basic Operators to UAS regime in 2003 for operating mobile services.

12.Move from Unified Access Service to Unified Licencing - Not Reviewed For 6 Years

13.When two-stage Unified Access Licensing policy could not be implemented fully as cleared by the Cabinet in October 2003, it was never again placed before the Cabinet for charting/approving the next /alternative course of action.

The Cabinet did not get the chance to consider the changed scenario whereby Unified Services Licensing Regime introduced with the intention of de-linking spectrum allocation from licensing could not be fully achieved. An approved interim stage was thus treated as a final destination by the DoT

14.DoT justified continuance of 2001 rates for issue of licenses to Audit stating that the Government treats telecom sector as an infrastructure sector and accordingly the Government's broad policy of taxes and regulation of the sector are promotional where revenue considerations play a secondary role.

15.Thus, despite all agencies having full knowledge of scarcity and under pricing of spectrum, the entry fee for issue of licences continued to be pegged at 2001 rates even in 2007 without delinking and independently discovering the price of spectrum through a market mechanism. Meanwhile, the entire scenario in the telecom sector had transformed amidst unprecedented growth in the sector.

16.All 29 applications for issue of new UAS Licence received in 2006-07 were not processed till October 2007 without assigning any reason/justification on records and without sending any communications to the applicants.

17.SM - What is the reason the files are kept pending in government offices?

18.Despite the TRAI's recommendation of 'no cap' which was accepted by the DoT in October 2007, on 24 September 2007 DoT issued a Press Release stating that applications for issue of licences would be accepted only up to 01.10.2007.

This press notification signaled the possibility of an impending cap in the number of licences to be awarded, which led to a sudden spurt in applications.

Till issue of this press release, 167 applications had been received including those remaining unprocessed since March 2006. After introduction of this artificial cap by the DoT, there was a sudden spurt in applications and 408 more applications were received in next 8 days resulting in accumulation of 575 applications till the declared cut-off date of 01.10.2007.

This spurt in applications indicated that the applicants were aware that spectrum was a scarce resource and such scarcity would become acute after this round of spectrum allocation, leaving little or no spectrum for future allocations.

Further, even this cut-off date was not taken into consideration and on the orders of Hon'ble MoCIT, only applications received upto 25 September 2007

19.Advice of the Hon'ble Minister of Law and Justice was ignored by DoT

20.DoT took 100-550 days to process the applications as against prescribed 30 days under its so-called FCFS policy, it gave not even an hour to the applicants to assemble at the DoT premises to collect LOIs and less than half a day to comply with the LOI conditions

21.It was noticed that 13 applicants were even ready with Demand Drafts (DDs) drawn on dates prior to the notification of cut off date.(Annexure III) An applicant also submitted the Performance Bank Guarantee (PBG) and Financial Bank Guarantee (FPG) of the Punjab National Bank (Annexure IV) prepared on 10 January 2008 in Mumbai to Ministry on the same day. Evidently, these applicants, had advance information about the issue of this notification by the DoT which enabled them to take appropriate advance action to draw the DDs and prepare other relevant documents for complying with the LoI conditions in spite of the changed time limit for compliance from 15 days to about half a day.

22. (LoIs) means Letter of Intents

23.First-Come-First-Served (FCFS) was the principle internally adopted in DoT for allocation of spectrum which was extended to issue of new UAS licenses.

Under the FCFS system all applications are received first in the Central Registry (CR) Section of DoT where date of receipt and serial numbers are posted on it.

Priority/seniority of applications is determined based on this date of receipt in the CR section.

24.The importance of date of submission of application in the FCFS Policy was altogether removed by giving precedence to the date of compliance to the LoIs.

25.As a result, applicants who had submitted the applications even a year later were given the chance of getting precedence over earlier applicants if they could comply with the LoIs conditions earlier.

The last nail in the coffin of transparency and objectivity of the FCFS policy was dealt by selectively leaking the date of issue of LoIs to a few applicants as a result of which, they were ready with pre-dated demand drafts of thousands of crores of rupees prior to the date of issue of the Press release calling for applicants to collect the LoIs from DoT

26.Thus the entire process of allotment of UAS licenses in January 2008 lacked transparency and appeared to have been done with the objective of favoring a few firms over others.

27.As a result thereof, Swan Telecom Pvt Ltd, which had submitted the application on 2 March 2007, was given the spectrum for the Delhi service area on 28 August 2008 itself while Spice Communications Ltd which had submitted their application in August 2006 has not yet been given (March 2010), spectrum for Delhi service area.

28.Similarly, for Maharashtra service area also, Spice Communications Ltd (Date of application- 31 August 2006) got the spectrum in May 2009 while Unitech and Videocon got the spectrum much earlier in September 2008 itself though they had submitted their applications for UAS licenses more than a year later in September 2007.

29.Idea Cellular Limited (Date of Applications- 26 June 2006) also got the spectrum in May 2009 while Unitech (date of Applications – 24 September 2007) got the spectrum in September 2008.

30.The admission of the DoT that some of the applicants knew about the cut off date decided in the DoT, even before it was notified through a Press release on 10th January 2008, only confirms that the processing of applications lacked fairness and transparency.

31.Verification of the files of the DoT and public documents accessed from the Ministry of Corporate Affairs, Government of India, New Delhi, revealed that as many as 85 Licenses out of the 122 new licenses issued to 13 Companies in 2008 were granted to those companies which did not satisfy the eligibility conditions prescribed by the DoT.

All 85 licenses were given to companies which did not have the stipulated paid up capital at the time of application. Further, 45 out of these 85 licenses were issued to companies who failed to satisfy conditions of main object clause in their Memorandum of Association.

32.Six newly incorporated applicant companies* belonging to Unitech Group (Brand name Uninor) had submitted their applications for grant of UAS licenses for 20 service areas to the DoT on 24 September 2007.

Along with their applications, these companies had submitted copies of their Memorandum of Association/ Articles of Association (MOA/AOA) indicating the main object clause of Telecom Sector thereby claiming to meet the eligibility criterion for the grant of UAS licence

33.On verification, it was revealed that all these companies had suppressed the fact of conditional nature of certification of registration done by the Registrar of Companies (ROC) on 20 September 2007 while registering the alterations in the main object clause in the MOA/AOA of these Companies.

The ROC while certifying the alteration of the main object clauses of all six companies had stated that the certificate was subject to the change of name of the Company.

34.Since in terms of Section 21 of the Companies Act 1956, the change of name of the Company could be done only with the approval of the “Central Government signified in writing”, the condition of the change of name of these applicant Companies was met in May 2008 only.

As a result, all these six new companies were registered afresh with the new names in May 2008 by the ROC.

Hence the alteration of the MOA of these Companies became effective in May 2008 only.

As a result thereof, the MOA of these companies did not permit them to operate in the telecom sector on the date of application i.e. 24 September 2007.
Hence, they were ineligible for the grant of UAS licenses.

35.These six companies had suppressed the fact of conditional certification of the alterations in the MOA/AOA by the ROC while submitting their applications for UAS licence on 24 September 2007.

All these companies also misrepresented the altered MOA/AOA as the original MOA/AOA in their applications before DOT.

The submission of the altered MOA/AOA of the Companies without full disclosure of the factual position of the alteration of the main object clause in the MOA/AOA and their conditional registration by the ROC was a fraudulent act of these six companies with the malafide intentions of obtaining the UAS licenses for 20 service areas by misleading the DoT.

Continued –

Suggested Reading –

Part One – understand the [ Comptroller and Auditor General of India ]
CAG Report on 2G Spectrum Scam in depth Don’t Forget its your money Scam Amount 1.76 lakh crores


Reality Views by sm –
Wednesday, November 17, 2010