The Rs 19,000 crore mystery: How the CAG figure for "undue benefit" to Mukesh Ambani's Reliance Jio shrank
On 8 May 2015, the Comptroller and Auditor General (CAG) of India tabled a report in Parliament that sharply indicted the Department of Telecommunications (DoT) for providing an “undue benefit” to Reliance Jio—a telecom company owned by Mukesh Ambani as part of Reliance Industries Limited (RIL). According to the CAG, DoT did so by allowing Jio to offer voice services under the Broadband Wireless Access (BWA) spectrum it had obtained through the 4G (fourth-generation electro-magnetic spectrum) auction conducted in 2010.
The report stated that the licence the company had acquired at that time did not allow it to include voice telephony among the services it could offer under the spectrum. A Unified Licence—which allowed the transformation of Reliance Jio from an internet service provider into a full services provider—was made available to it quietly, and as the CAG report alleged, at a price that was far below the prevailing market price. The cost of this “undue benefit” according to the report: Rs 3,367 crore.
However, during the press conference that followed the submission of this report, it became clear that there was more to the story. Suman Saxena, the deputy CAG, found herself being pushed to answer a question she had not quite anticipated. The question revolved around the disparity between the report that was tabled, and the one that had been drafted by the CAG nearly a year ago. In August 2014, the CAG had drafted a report in which the original figure for the “undue benefit” was Rs 22,842 crore—seven times higher than the figure stated in the report eventually presented in May. How and why did this happen? Saxena refused to provide any clear answers to this query, and merely said, “A draft is a draft.”
In its draft report, the CAG was highly critical of the government for allowing Reliance Jio to use Infotel Broadband Services Private Limited (IBSPL) as a front company to acquire broadband spectrum. IBSPL was, at that time, a tiny internet service provider promoted by Anant Nahata—the son of Mahendra Nahata, who is the promotor of Himachal Futuristic Comunications Limited (HFCL), a manufacturer of telecom products and a provider of telecommunication services. Interestingly, HFCL came into the limelight in 2011, when it was alleged that Datacom, a company owned jointly by Videocon and HFCL, had been one of the prime beneficiaries in the allotment of 2G spectrum during the reign of A Raja as the telecom minister. Earlier, in 1995, Mahendra Nahata had bid for nine 2G licences and had to be “bailed out” by the then Communications Minister Sukh Ram. The CAG draft report had further claimed that Reliance Jio had acquired the spectrum exploiting loopholes left by the DoT while framing rules for the auction of 4G broadband wireless access (BWA) spectrum. The company then allegedly wangled permission to provide mobile telephone services on this spectrum.
The final report of the CAG that was presented on 8 May, however, has diluted this criticism considerably. It has deleted important references in the draft report to the alleged “rigging” of the auction by two “colluding” parties: Reliance and Infotel.
In September 2014, the draft report of the Director General (Audit) along with the correspondence between the DoT and the office of the CAG from June to August 2014 were leaked. The voluminous documents marked “secret” soon entered the public domain and several reports appeared in various websites, newspapers, magazines including the Press Trust of India.
In an attempt to unravel the mystery of the two differing reports, we perused documents running into hundreds of pages, dense with technical terminology, legalese and bureaucratese. What emerged was a fascinating account of how the system works or, more aptly, does not. A few appeared to benefit by virtue of their familiarity with the system and knowledge of how it could be manipulated to exploit the scarce availability of a finite resource.
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In February 2010, the DoT issued a notice inviting applications to participate in the auction of 3G and 4G spectrum, which would be held separately. Any corporate entity holding Unified Access Services/Cellular Mobile Telephone Services/Internet Service Provider (UAS/CMTS/ISP) licences could bid for the spectrum. Any entity that could give an undertaking that it would obtain a UAS/ISP category ‘A’ licence as a “new entrant nominee” licencee before starting operations was also allowed to participate in the auction for the Broadband Wireless Access (BWA) spectrum, as per the DoT guidelines.
Since the DoT allowed virtually any ISP to bid, IBSPL, which was ranked 150th in the list of ISPs by the Telecom Regulatory Authority of India (TRAI), entered the fray. At this point, IBSPL had a paid-up capital—the amount of the company’s capital that had been funded by its shareholders—of Rs 2.51 crore, a net worth of Rs 2.49 crore, and just one single leased line client.
Nevertheless, it was able to match the financial requirement for bidders, an earnest money deposit—a deposit made to display the company’s definite intention to bid—in the form of a bank guarantee from Axis Bank of Rs 252.5 crore, a sum that was a hundred times its net worth. IBSPL won the bid and acquired 20 Mhz (Megahertz) unpaired BWA spectrum for all 22 telecom circles in India at a final price of Rs 12,847.77 crore, 5,000 times the value of its net worth. The e-auction was conducted over 16 days starting 24 May 2010. Major players such as Reliance Communications (headed by Mukesh Ambani’s younger brother, Anil), Vodafone Essar and Tata Communications exited the auction due to the high prices. Idea Cellular did not even participate in the bid.
IBSPL, with its negligible net worth, was allowed to proceed by the government of India even as the bid amount rose. There was no intervention to stop the auction from either the DoT or an inter-ministerial committee (IMC), comprising officials from other government departments such as the Departments of Industrial Policy & Promotion, Information Technology and Economic Affairs in the Ministry of Finance, which had been set up to monitor the auctions.
This winning bid came against a reserve price of Rs 1,750 crore for the pan India slot of 20 MHz BWA spectrum. The reserve price was kept low in the event that the subsequent rollout of BWA infrastructure required additional investments, a fact pointed out in the final CAG report.
IBSPL, incorporated in February 2007, had been granted a pan-India ISP licence in November 2007. In 2009–2010, it had just a single leased line client from whom it earned Rs 14.78 lakh. On 31 March 2009, it had Rs 18 lakh in its bank, with Rs 11 lakh diverted towards the 100 percent margin money for the bank guarantee of Rs 10 lakh given by the firm to the DoT for the ISP licence.
Its promoter Infotel Digicom Pvt Ltd (IDPL), promoted by Anant Nahata, incorporated in March 2007, had an equity capital of Rs 6 lakh and a net-worth of Rs 8.55 lakh as of 31 March 2009. IDPL did not have any fixed assets on that date and had earned a revenue of Rs 2.59 crore primarily from other income with net profit of Rs 42.80 lakh in 2009–2010. According to the audited accounts of IDPL, the company had given 100 percent margin money in the form of a fixed deposit of Rs 25 lakh as security against issuance of bank guarantee for Rs 25 lakh as of 31 March 2010.
However, the draft CAG report pointed out that that no disclosure had been made of any margin money paid for the bank guarantee used for the winning bid in IBSPL’s annual accounts for 2009–2010.
The e-auction for broadband wireless access spectrum ended on 11 June 2010, after 117 rounds. The provisional results recommended by the IMC were to be approved by a Committee of Secretaries to the government of India headed by the Cabinet Secretary and including the Finance Secretary, the Secretary to the now-defunct Planning Commission, and the Secretary of DoT.
Instead, the results were declared on the afternoon of 11 June with the approval of the inter-ministerial committee indicating that IBSPL was the winner. According to the draft CAG report, when the Committee of Secretaries met on 12 June 2010, to consider the recommendation of the IMC for approval of the provisional results, they were informed that the “auctioneer was satisfied with the conduct of the auction process.” It was also reiterated that “the electronic auction system was not compromised from both security and competition aspects and there was no indication of any collusive and coordinated bidding.” The committee was informed that the details of the BWA auction including the provisional results had been scrutinised by IMC and were recommended for approval.
Meanwhile, on 11 June, at an extraordinary general meeting of its shareholders called at short notice, IBSPL raised its authorised share capital—the maximum amount of share capital that a company can, according to its constitutional documents, allocate to its shareholders—by 2,000 times, from Rs 3 crore to Rs 6,000 crore by issuing 75 percent of its shares to RIL, a listed company, making itself a subsidiary of the latter.
All this was done before IBSPL’s memorandum of association—a document that governs the relationship of the company with external entities—was altered and the increase in its authorised share capital recorded by the Registrar of Companies in the Ministry of Corporate Affairs.
The formalities were sought to be completed six days later, on 17 June, after IBSPL authorised its board of directors to allot 4.75 billion equity shares of Rs 10 each to RIL and 250 million shares to IDPL, totalling Rs 5,000 crore. RIL now owned 95 percent of the company with 5 percent held by IDPL.
On 19 June 2010 IBPSL ceased to be a private limited company and became a public limited company. On 22 January 2013, the company was renamed Reliance Jio Infocomm Limited.
The takeover of IBSPL by RIL made headlines. The draft CAG report claimed that Anant Nahata had confirmed on television on 11 June 2010 that talks were on with the Reliance group. In fact, a day earlier, on 10 June 2010, the Economic Times had mentioned that IBSPL could be taken over by RIL, with all-India BWA spectrum prices touching Rs 12,257 crore. This story is referred to in the final report of the CAG with Infotel mentioned as “a group company” of HFCL, the only instance in which there is a mention of the involvement of the Nahatas in the final CAG report.
Between 1991 to 1996, when PV Narasimha Rao was the prime minister of India, Pandit Sukh Ram was Telecom Minister. In 1996, the Central Bureau of Investigation (CBI) seized Rs 3.6 crore in cash from his residence—the seizure made it to the Guinness Book of World Records. He was convicted of various charges of corruption in November 2011 and sentenced to five years of rigorous imprisonment by a Delhi court in 2002 for a separate case. The different allegations that were levelled against him during his tenure as telecom minister included the charge that he had favoured companies like HFCL by not insisting on the timely payment of licence fees that were due.
On this occasion, however, Nahata had been made richer by Rs 4,750 crore, and not a single eyebrow seemed to be raised.
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The second part of this story is the manner in which Reliance Jio was able to offer voice services in 2013. In 2011, after the auction, IBSPL, now owned by RIL, applied to DoT for a “mobile country code”and a “mobile network code” that would enable an operator to set up a “public land mobile network”—a network that is operated either by the administration or an accepted agency for the purpose of providing land telecom services to the public.
The DoT had, first in 2008 and again in 2010, clarified that voice services were permitted only using 2G and 3G spectrum. The TRAI had recommended that while 3G spectrum was meant for voice telephony as well as data applications, 4G spectrum or broadband wireless access was meant for faster diffusion of broadband and data services only.
IBSPL/Reliance said it wanted the BWA (or 4G) spectrum to provide data services on a technological platform called long-term evolution (LTE)—a 4G broadband wireless technology that was developed by the Third Generation Partnership Project (3GPP), a global industry trade group. According to the draft CAG report, this was objected to by a wing of the DoT, the Telecommunication Engineering Centre, which, in March 2012, held that the capabilities “of LTE technology are much wider in scope than what is permitted in the ISP licence and since LTE is a technology which can be used for providing full-fledged mobile services along with high speed data services, it is possible for an ISP licencee to use LTE for both internet services as well as full-fledged mobile services....Currently full mobile services were provided under UAS licence only. Therefore these aspects may be examined by DoT.”
Thereafter, various committees were set up to examine the issue. In April 2012, at the request of the DoT, the TRAI furnished guidelines on changing the licensing framework and replacing it with a new Unified Licence regime, which went on to facilitate the migration of internet service providers into full service operators offering voice services. The TRAI guidelines were deliberated upon by a DoT committee and subsequently by the Telecom Commission.
In August 2012, another DoT committee held that 3G spectrum was not to be sold as “liberalised” spectrum—wherein the terms of the licence do not require that the frequencies be used for a specific service or technology—and argued that had the spectrum blocks been specified and declared as liberalised spectrum blocks, the bidders would have taken “informed” decisions while placing bids during the auction and that the “market discovered price” might well have been different. In earlier telecom regimes, the DoT would specify the purpose for which spectrum could be used, for instance, voice or data, but not both.
Essentially, the committee was arguing that had it been known that those using 4G/broadband wireless access spectrum would be allowed to provide voice services, the bidders would have bid for spectrum based on a different set of commercial criteria. In essence, all bidders would have known in advance that the 4G/BWA spectrum could be used for both data and voice, and not data alone, and the playing field would have been level. The rule was changed by the DoT in February 2013, whereas the auction had taken place between May and June 2010.
In September 2012, the Telecom Commission decided that, given the complexities of the Unified Licence regime, further analysis and deliberations were required. It was felt that there were serious implications in implementing the TRAI’s recommendations on the Unified Licence regime for new entrants as well as for existing licencees providing various services.
Yet another committee of the DoT was constituted in September 2012 to examine the issue and suggest the way forward. On 25 January 2013, this committee was expanded by including all the full-time members of the Telecom Commission, including the Secretary, Telecom, and other technocrats.
In February 2013, this committee approved the conversion of ISP licences to the new Unified Licence. Reliance Jio was the first to take advantage of this decision. The company paid an “entry fee” of Rs 15 crore and a “migration fee” of Rs 1,658 crore in August 2013 and was granted a Unified Licence on 21 October 2013, formally authorising it to provide voice services.
According to the CAG, the fee of Rs 1,658 crore was decided upon in 2001 and this price did not reflect the “present value” of the spectrum in August 2013. Taking into account the rate of inflation between 2001 and 2013, the value of the licence would have been, the report estimated, at least Rs 5,025 crore. This meant that Reliance Jio got an “undue advantage” of Rs 3,367.29 crore since the price at which Reliance migrated did not factor in changes in the value of the spectrum over a period of 12 years.
During the auctions of 2010, the UAS/CMTS licencees had paid Rs 1,658 crore as an entry fee, while the ISP licencees has paid only Rs 30 Lakh. Between 2001, when the price had been decided upon, and 2013, when Reliance paid the entry fee, the market conditions had changed drastically. But even in this case, the price was not modified to reflect the present value.
DoT’s permission had allowed ISP licencees holding 20 MHz BWA spectrum to offer pan-India voices by paying the incremental Rs 1,658 crore entry fee, a fraction of the market price of same quantity of 3G/2G spectrum.
According to the draft CAG report, the difference between the proportionate prices for 20 Mhz band size in 2.1 Ghz spectrum band (3G) and 2.3 Ghz spectrum band (BWA) was Rs 20,653 crore on the basis of the 2010 auction price. Add to that the “net” (not gross) present value of the entry fee for UAS licencees at the end of financial year 2009–2010, that is (Rs 3,847 crore minus Rs 1,658 crore), and the the figure would increase to Rs 22,842 crore.
The final report of the CAG presented in Parliament on 8 May omitted any reference to the above calculation but it reiterated that loopholes were never plugged by the Department of Telecom.
In September 2006, the TRAI had recommended stiff rollout obligations to facilitate the rapid expansion of broadband services in rural and remote areas. It had recommended that BWA spectrum licences be awarded for a five-year duration, be renewable up to 20 years on payment of spectrum acquisition fee every five years and that it was mandatory to satisfy all the relevant terms and conditions for a company to roll-out BWA services. However, in the notice inviting application (NIA) for the auction of the BWA spectrum, DoT had allowed the use of the spectrum for upto 20 years, unless the licence was either revoked or surrendered earlier.
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In its final report, the CAG stated that despite the liberal roll-out obligations of five years, the BWA spectrum has remained largely unutilised with hardly any significant roll-out of services since the allotment of spectrum in 2010.
“The liberal roll-out obligations have not been achieved by any of the six winners even after four years since the award of the spectrum. BWA services have been started only in a few select cities by only one operator. BWA services have not been rolled out in rural areas which was one of the prime objectives of the auction,” the CAG pointed out.
Bharti Airtel with four service areas has started services in select cities. Aircel (eight service areas), Tikona (five service areas), Augere (one service area) had not rolled out any service, it was stated. Qualcomm which won four service areas sold out to Bharti, which is reportedly in talks with Augere to take it over. Reliance Jio Infocomm, with 22 service areas, has also not rolled out any service yet, although there are many media reports suggesting that the roll-out is imminent.
Even as RIL has spent more than Rs 80,000 crore over the last five years on Reliance Jio, it is only now that there seems to be an inkling that services are on their way. According to a company statement on 13 May 2014, Reliance Jio Infocomm has signed an enabling loan—a loan taken to fund the purchase of commercial goods, which would in turn, serve as collateral for the loan—of Rs 4,800 crore to fund electronic purchases from Samsung Electronics and Ace Technologies Corp. The company is also seeking to procure Chinese 4G handsets which can be sold in packages of about Rs 2,000 ($30)—reminiscent of 2003 when the still undivided Ambani empire rolled out services offering phone sets for a down payment of around Rs 500 ($11).
In its final report, the CAG pointed out that the DoT did not maintain parity in the spectrum charges that were being paid by the UAS/CMTS operators providing voice services and operators who were using broadband wireless access to provide voice services. While UAS/CMTS operators were paying between 2 percent and 5 percent spectrum usage charges, depending on the quantum of spectrum held, broadband wireless access operators were asked to pay only 1 percent of the adjusted gross revenue as spectrum usage charges.
“This relaxation would result in significant loss of revenue to the government over [a] 20-year licence period, since the BWA spectrum had to provide voice services also in addition to data services... These deficiencies led to (a) lack of efficient use of spectrum, hoarding of spectrum in view of absence of roll out of BWA services and non-realisation of the expected revenue share in the form of SUC even after more than four years of allocation,” the report of the CAG concluded.
Finally, a key question still remains. The CAG may claim that it is “commenting on the lack of due diligence by the DoT” on this matter. But what it refuses to explain is how the figure of the “undue benefit” changed to a minuscule proportion of the original estimate in the course of a mere year.