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From Vodafone to 2G PDF Print E-mail
Friday, 03 February 2012 17:39
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One ruling benefitted the corporate sector, the other hurt it, but both showed the government to be arbitrary

In less than two weeks, two judgments from the Supreme Court on telecom have changed the face of the industry. While the first one went in favour of Vodafone and ensured it did not have to shell out R11,000 crore as capital gains tax on the purchase of Hutch’s India operations, the second one hit the firms that got licences from A Raja at bargain-basement prices in January 2008 by ruling that all 122 licences had to be cancelled as they were issued in a “totally arbitrary and unconstitutional manner”. What is common to both judgments, however, is that the government has been exposed as behaving in a completely arbitrary manner.

It’s bad enough for investors to hold the view that the government is arbitrary, it is inexcusable that the same view is endorsed by the highest court of the land. Indeed, in the Vodafone case, the judgment was delivered by none other than the Chief Justice of India, and he lambasted the taxman for stepping outside the boundaries of the law and trying to reconstruct the Vodafone-Hutch deal in such a way that capital gains had to be paid on it. In any case, it was always ludicrous that the company that bought Hutch’s operations was being asked to pay capital gains taxes when the gains were made by Hutch.

In the current case, similarly, while there were 575 applications for spectrum, Raja arbitrarily decided he would give licences only to those firms that applied before September 26, 2007—interestingly, this decision was announced only on January 10, 2008! In other words, while changing the cutoff date, Raja knew exactly who he was benefiting. Raja also changed the rules to say that companies would be given licences on the basis of who paid first—since only a handful of companies knew this, only the ones who ensured they were the first to pay, got the licences.

What takes that cake is that even after the Supreme Court gave its ruling, telecom minister Kapil Sibal sought to put the blame on the NDA, saying that the Court had held the NDA’s policy of first-come-first-served (FCFS) was discriminatory and all that the UPA was guilty of was following in the NDA’s footsteps! The critical difference between the NDA and Raja’s FCFS was that when the NDA gave out such licences, there was no great mismatch between demand and supply—when Raja gave out 122 licences, there were 575 applications. In any case, during UPA-1, the government had come out with its own licensing policy and was under no compunction to stick to FCFS. Even more important, since both the Prime Minister and the law ministry had opposed Raja’s FCFS, it can’t be said that UPA-2 followed NDA’s policies without knowing the consequences—interestingly, none of the licences cancelled by the Court are those issued by the NDA, only Raja’s licences have been cancelled.

The history of telecom is replete with examples of government arm-twisting/favouritism, sadly even when so-called independent regulators have been set up to ensure this doesn’t happen. Trai’s role in the Raja case is a good example of this. Under the then subscriber-linked spectrum policy, telcos like Bharti and Vodafone were entitled to get additional chunks of spectrum. Trai, however, dramatically hiked the criterion under the policy and this ensured the government no longer had to give additional spectrum to telcos. This then freed up spectrum and this is what allowed Raja to play his game of favourites—make no mistake, if Trai had not played ball with Raja, there would have been no 2G scam. The Court has also come down on Trai in its judgment on Thursday.

Interestingly, even though the government did precious little to stop the Raja scam from taking place, the scam could have been over on July 1, 2009, had the government been interested in doing so. A company called STel had applied for 6 licences before September 26, 2007, and for 16 after this, so as per Raja’s January 10, 2008, press release, it got 6 licences. STel went to the Delhi High Court to ask for 16 more licences since it argued the January 10 press release announcing an arbitrary cut off was illegal. On July 1, 2009, the Delhi High Court quashed the press release. Instead of accepting this and declaring the whole process illegal, the government challenged the decision before a division bench. On November 24, 2009, the division bench upheld the earlier judgment and even asked the government to pay STel (‘imposed costs’, in jargon) for wasting its time. The government then went to appeal in the Supreme Court and, for good measure, threatened to cancel STel’s 6 licences. This rattled STel, and it told the Court it didn’t want the additional 16 licences. Naturally, the Court dismissed the case, but while doing so it said it was not overruling the high court’s ruling.

Sadly, the government’s arbitrariness is not restricted to telecom—see ‘Kill it before it grows’, Nov 3, 2011, for the 3G story of arbitrary behaviour (http://bit.ly/yveR6f). In the Cairn-Vedanta case, the government arm-twisted Cairn to make huge concessions to the state-owned ONGC (http://bit.ly/x0qMq9) and in the case of hill-city Lavasa, while the company was challenging the central government’s jurisdiction in one court, the government filed charges against it in another court.

How the current case pans out remains to be seen, though Sibal has indicated the government will go by what the Court has said. The Raja saga, contrary to what you may think, has only begun since the ball is once again with Trai and the government—Trai will decide on whether the Raja beneficiaries are to be compensated for what they paid the government and what they’ve invested in these firms, for instance. The saving grace is that India has probably come a long way since 2005 when, after the government lost the tax case against ITC, it actually promulgated an ordinance to change the law with retrospective effect to be able to retain that part of the tax that ITC had paid pending the Supreme Court ruling. In 2003, it also refused to implement a TDSAT ruling on limited mobility and came out with a new policy allowing telcos with landline licences to offer full-blown mobile services. With two stinging indictments in two weeks, however, the government may have learnt its lesson.

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