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Understanding the nuances of 2G Spectrum Technology Scam

Vidya Mishra
What is Spectrum
The mobile phones work on wireless technology.   The signals are carried on airwaves of particular frequencies.   A band of such frequencies is known as spectrum.
What is 2G
2G is the short form for the second generation wireless telephone technology.   This technology was invented in 1991. It basically delivers voice calls and SMS, along with slow speed data services.
2G technology operates in the frequency band of 800, 900 and 1900 MHz. Each mobile operator is allotted a separate bandwidth within this range of frequency, which is necessary to avoid interference or mixing of signals of different operators.
What is 3G
3G is third generation wireless telephone technology, which was first offered to world in 2001. Besides the usual voice calls and SMS, it enables high-speed internet, video calls, mobile television etc. on mobile handsets and therefore is a premium service. 3G technology operates in the frequency band of 2100 MHz.
Choice between 2G and 3G
For users who wish to use their phones for voice calls and SMS only, 2G technology is sufficient. 3G technology is for those users who want to use their mobile handsets for broadband internet, video calls and mobile television. These are optional services and can be priced at a premium.
Since, majority of the subscribers use their mobile phones only for voice calls and SMS, it is necessary that their costs are kept to minimum possible levels to make mobile phones affordable to everyone in the country.
The need to keep the costs low was also identified by the Planning Commission. The 10th Plan Document setout getting principle of the spectrum policy to be promotional in nature, with revenue consideration playing the secondary role. The intention has always been to increase the tele-density rather than revenue sharing.
Has there been a Revenue Loss in 2G Allocations?
The office of the Comptroller and Auditor General (CAG)  asserted that the 2G spectrum allocation made by the Government in 2008 entailed revenue loss to the exchequer and did not give a “clean chit” to anybody in the Government, but the  revenue loss estimates (for 2007-10) put out by it in its report was only a “presumptive loss” as there are various other determinants such as scarcity value, business plan envisaged, nature of competition, growth of sector and number of operators.
How did CAG arrive at this presumptive figure?
CAG had for the audit taken three scenarios that are benchmarked to the actual existing situations at that time. The three scenarios put the range of revenue loss for the 2007-10 period at Rs 57,666 crore to Rs 1,76,645 crore.
Three scenarios: The three scenarios are rate offered by S Tel, rates on the basis of 3G auction and sale of equity by new licensees. The loss to the Government under scenario of adoption of S Tel rate has been estimated at Rs 67,364 crore. If one were to go by the rates on the basis of 3G auction, revenue loss is Rs 1,76,645 crore. If the third scenario of sale of equity by the new licensees were to be taken, the potential loss to the exchequer was Rs 69,626 crore (Unitech) and Rs 57,666 crore (Swan).
CAG is of the firm view-point that there is a loss (to the exchequer) that cannot be denied. The CAG report  also highlighted in a separate box that the Prime Minister, Law Minister, Finance Secretary, DOT Secretary and Member Finance of the Telecom Commission were not in favour of hasty allotment of licences without revision of spectrum prices.
UPA Government’s view-point on the CAG based  calculations:
A. 3G spectrum was auctioned in May 2010, which provided high revenues to the Government. Similarly, 2G spectrum should also have been auctioned in 2007, instead of providing licenses on ‘First Come and First Get’ basis with an entry fee of Rs 1651 Crore.
i. This is an erroneous consideration, as the two technologies are completely different.
ii. While 3G is a premium data service, 2G is about basic voice call and SMS, which is used by the common man and therefore, it is necessary to keep it at the lowest possible prices.
iii. It was not the first time that in 2007 the 2G licenses were given without auction. The 2G licenses have always been given on entry fee basis since 2001, as recommended by the National Telecom Policy, 2001.
iv. Infact, ever since the 2G technology was introduced in country, it has never been auctioned!
B. Second calculation is of the presumptive loss of Rs 67,364 crore, based on the offer made by S. Tel for purchase of spectrum.
i. What is S. Tel.?
ii. The person who made the offer on behalf of S. Tel. was earlier behind SrinivasCelcomm.
iii. The license fee date of SrinivasCelcomm was extended from 24th April 1998 to 31st December 1998 by the NDA government, unduly benefitting the person.
iv. Incidentally, the Telecomm Commission had opposed the decision to extend the license fee date in three consecutive meetings. But the Vajpayee Government over-ruled the recommendations and extended the date just a day before the Vote of No Confidence, which the government had lost!
v. Despite this blatantly undue favour by Vajpayee Government, SriniwasCelcomm could never become a substantive player in the mobile phone industry.
vi. Hence, its unsolicited offer to purchase spectrum was without any substantive basis. It was made with suspect and ulterior motive to confuse the process of spectrum allocation.
C. The third estimate of the presumptive loss by CAG is based on the sale of the controlling interest in the equity of M/s Swan and M/s Unitech, after the allocation of 2G license.
i. Both, Swan and Unitech sold their equity to M/s Etisalat and M/s Telenor respectively.
ii. The profit earned by the two companies has been extrapolated by CAG to arrive at the presumptive loss of Rs 57,666 and Rs 69,626 crore.
iii. The prices offered by Etisalat and Telenor are based on their estimation as to how the mobile market would grow in India in the years to come, which may or may not be vindicated in future.
The Government also maintains that  why in 2007, the entry fee was kept at the level of 2001, i.e. Rs 1651 crore and argues that the figure of Rs 1651 is only one component of the license fee. It is the entry fee valid for the first year of license that is given for 20 years.In the subsequent years, the license fee comprises of three components:
i. Entry fee of Rs 1651 crore
ii. Additional amount calculated on the gross revenue earned by the licensee in the preceding year
iii. Amount calculated on the revenue sharing with the government on per subscriber basis as per the formula introduced in 2003.
So the license fee increases every year for each licensee. Moreover, greater the number of subscribers with a service provider and greater is its revenue, the more is its license fee in the subsequent year. Another reason the Government puts forward is that it was as per the recommendations of TRAI, which said that it was necessary to maintain level playing field for all the service providers, whether they are new or old licensees.
TRAI, which is the statutory body, had argued that upto 2007, 52 licensees had entered the mobile sector by paying Rs 1651 crore, so how can the new ones be asked to pay more through auction. A higher entry fee would substantially increase the cost of operations of the new licensees, while they would be expected to compete with older ones in existing market itself. Therefore, TRAI ruled that the entry fee must be maintained at Rs 1651 crores.
• Entry fee for spectrum licenses in 2008 pegged at 2001 prices
• Mobile subscriber base had shot up to 350 million in 2008 from 4 million in 2001
• Rules changed after the game had begun
• Cut-off date for applications advanced by a week
• Licenses issued on a first-come-first-served basis
• No proper auction process followed, no bids invited
• Raja ignored advice of TRAI, Law Ministry, Finance Ministry
• TRAI had recommended auctioning of spectrum at market rates
• Unitech, Swan Telecom got licenses without any prior telecom experience
• Swan Telecom given license even though it did not meet eligibility criteria
• Swan got license for Rs. 1537 crore, sold 45% stake to Etisalat for Rs. 4200 crore
• Unitech Wireless got license for Rs. 1661 crore, sold 60% stake for Rs. 6200 crore
• All nine companies paid DoT only Rs. 10,772 crore for 2G licences

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