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Monday, 22 March 2010 00:00
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You'd expect Raja to reduce the arbitrage possibilities - instead, he's gone ahead and increased them


You have to hand it to Communications Minister A Raja. Instead of acting on the RCom audit report, which showed it had paid Rs 316 crore less by way of licence/spectrum fee in 2006-07 and 2007-08, he muddied the waters by ordering audits into other telcos like Bharti, and Idea. Though the audits didn’t show they were doing the same kind of misclassification of revenues, the way his ministry asked the auditors the question made it appear they were — so the reports got reported in a certain way, and this led to a demand that be asked to audit all telcos!


While the CAG ruse will mean a delay of another year or two before any action is taken, the real issue is that Raja’s policies are encouraging firms to mis-state their accounts — so, while licence fees are 6, 8 and 10 per cent for C, B and A categories of telecom circles, respectively, they are 6 per cent for long-distance calls and zero for internet services.

Instead of reducing this arbitrage by introducing one flat fee for all types of telecom services, whether voice or data, Raja referred the matter to the telecom regulator, which has still not taken a view on it. The new spectrum charges that will come into force soon are going to worsen this arbitrage.

But first, the RCom scandal. In July 2008, pointed out that the revenues RCom reported to the government were a fourth lower than those reported to its shareholders. It also reported a higher proportion of its revenues as coming from internet services which, as has just been pointed out, don’t attract any levies. All of this lowered RCom’s payments to the government. It took six months after the Kotak report for Raja to order an audit, the final terms for which were finalised only in March 2009 — the report was out in October but no action has been taken so far despite Raja assuring Parliament that this would be done by January 2010. In May, however, Raja ordered special audits into Bharti, Vodafone and — reports on and Idea were out last week.

Both showed an underpayment of licence/spectrum fee — Rs 101 crore for Bharti and Rs 72 crore for Idea — but with a vital difference. There has been a long-standing dispute between telcos and the government as to what constitutes “revenues” (for instance, should dealer discounts be subtracted from the MRP while calculating “revenues” which, eventually, form the basis of all licence/spectrum fees?) and the matter went to the telecom tribunal, the TDSAT. Bharti, Vodafone and Idea all classified their revenues based on the ruling — so, in that sense, using the TDSAT definition of “revenue” was neither incorrect nor illegal. But since Raja’s ministry had asked the auditors to include such revenues, the auditors said both firms also had short-changed the exchequer!

Differential licence fees encourage incorrect reporting
The old arbitrage
Shortfall in licence/spectrum payments for 2006-07 and 2007-08 (Rs cr)
RCom 316 Lower fees for internet services, for example, encouraged misclassification
Bharti Airtel 101 Since their classification of revenue is as per a TDSAT ruling, this shortfall is academic in nature — auditors put it in since DoT wanted it in this manner
Idea 72
The new arbitrage
Differential licence fees for 3G/BWA will compound the problem
Voice Revenue 100 100 100 100
Data Revenue 20 20 20 20
License Fee 12 12 11.2 11.2
Spectrum Charge 7.2 3.6 6.2 3.2
Both and CDMA firms assumed to be in 'A' circles; GSM has 9 MHz of spectrum and CDMA has 5 MHz of CDMA and 4.4 MHz of GSM spectrum; Combined charge paid on (data) and 2G (voice) revenues; in case of BDA, revenues not combined, 1% spectrum charge paid on them


Given the RCom experience, you’d expect Raja would reduce the arbitrage possibilities — instead, he’s gone ahead and increased them. There are various forms of arbitrage available now:

  • Take the example of a pure GSM firm which has 9 MHz of GSM spectrum and a dual-technology one which has 5 MHz of CDMA spectrum and 4.4 MHz of GSM spectrum. While both will pay a 10 per cent licence fee, the pure-GSM firm pays 6 per cent of revenues as spectrum charges while the dual-technology firm pays 3 per cent! 
  • Once 3G/BWA services are allowed, the new rule is that firms will pay spectrum fees on the combined 2G and 3G revenues — the licence fee will remain the same at 6, 8 and 10 per cent for C, B and A circles. For BWA, however, the revenues won’t be combined with 2G revenues and a flat 1 per cent spectrum charge will be paid on the BWA revenues — the BWA licence fee ranges from 0 to 6 per cent (!), as compared to 6 to 10 per cent for 2G/3G services. So, take the case of a firm that has Rs 100 (see table) as voice revenue and Rs 20 as data revenue, with the latter coming from either 3G or BWA services. Depending on how the revenues are classified, as 3G or BWA, the licence and spectrum charges can be reduced significantly. So, till the next scandal and the next audit report… .


Sunil Jain’s article, “Till the next audit report”, published on March 22, had inadvertently made a mistake with regard to the timeline of the submission of the audit report on Reliance Communications. Communications Minister had ordered the audit for other telecom companies before the RCom audit report was submitted. We, therefore, regret the error. We also clarify that neither the writer of the article nor the newspaper had any intention of defaming or maligning Reliance Communications or any other entity. The article and the opinion expressed in it were based on public information.



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