Does CAG have a case against Reliance?

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In the vitriolic run-up to the 2014 General Election, a river of rumours went into spate about one of India’s mega-magnates, Mukesh Ambani, backing the BJP’s Narendra Modi. That the rumours were contradictory — Modi, now the prime minister, was also supposed to be thick with another of the tribe, the Ahmedabad-based Gautam Adani — deterred no one. What counted for credence was that the Ambani brothers (who are today running a fluid feud based on their remarkably differing worldviews) have always been conjectured to be masterful backroom boys of a series of governments at the Centre.

The Aam Aadmi Party (AAP) picked up on the power of scuttlebutt, and was the first to go to town with the charge that Mukesh Ambani — who has largely used his influence sans the flamboyance associated with his younger brother Anil Ambani — had earlier funded the Congress, and had switched tack to sail with Modi. AAP was in the company of several NGOs and liberals/activists.

Such rumours carry a presumption of favour. The popular imagination ran to Mukesh Ambani’s Reliance Industries Limited (RIL) being showered with government largesse.

Over the past two months, however, the wind has gone out of these rumours. Modi has pointedly avoided meeting the Ambanis since his ascension. His Cabinet has been told in no uncertain terms that the business family that once had the right of way in the corridors of power — Mukesh Ambani was a regular sight in the upper bureaucracy and the Prime Minister’s Office when Manmohan Singh was in power — was not to be entertained.

So, as the corporates love to say, what’s the deal with docking Reliance?

Not since Ambani père skulked through the interiors of the Indian government’s offices with a battered briefcase in hand and obsequious power in his heart has the Ambani family been treated with such hissy governmental disdain as it is today. Unwilling to lower himself to the middle bureaucracy, Mukesh Ambani is said to have taken Modi’s proscription to heart. His maverick younger brother, less hamstrung by custom and decorum, was photographed a few days ago in remarkable bonhomie with Piyush Goyal, Minister of State with independent charge for power, coal and new and renewable energy. Modi is said to have summoned Goyal, given him a glacial dressing down and ordered him never to publicly hobnob with Ambani.

If Mukesh Ambani really had contributed to Modi’s electoral cause, this is an unusual, unanticipated setback. It’s also prima facie illogical. Who kills a golden goose?

Only someone who has a larger golden goose.

The Ambanis, used to casual impunity, now have some major issues facing them — including the pricing of gas extracted from the Krishna-Godavari (KG) Basin off the coast of Andhra Pradesh; suo motu cancellation of the huge Haryana-Jhajjhar Special Economic Zone (SEZ) earlier this year; a possible hefty fine by the Securities Exchange Board of India (SEBI) on RIL’s insider trading of Reliance Petroleum Limited (RPL) shares immediately preceding its acquisition; dispute with the government over the KG Basin gas production contract; and, above all, the Comptroller and Auditor General (CAG) of India’s ongoing audit of 4G spectrum auction in 2010 — which seems to be heading towards exposing a scam significantly more explosive than the $30 billion 2G telecom scam of 2010.

TEHELKA accessed the draft CAG audit report.

GAS PRICES
Earlier this month, Petroleum Minister Dharmendra Pradhan said in two media interviews that this government’s priority was the poor.

One of Modi’s first acts as prime minister was postponing for three months the fuel price revisions that announced him as a man of hard decisions. Months had gone into fashioning him as a “tough love” specialist; but it took mere days of being face-to- face with national realpolitik for populism to reestablish its primacy. Essentially, he pulled the rug out from under the private oil majors in the country, who had been expecting a windfall.

Modi’s government compounded the grief for RIL on 14 July, adding another $579 million to the existing fines of $1.79 billion on RIL for the underproduction of natural gas from the D-6 block of the KG Basin. This brings the weight of RIL’s punitive torment to $2.37 billion, or more than Rs 14,000 crore (which is, to give you a sense of things, equal to — give or take a few hundred crore — Madhya Pradesh’s fiscal deficit for FY2015). This whopping fine is proposed to be set off against RIL’s future revenue generation from the KG Basin. However, the Central government hasn’t worked out — or at least finalised — the deduction and interest tranches.

TEHELKA had published a detailed story on the KG Basin gas price issue (Bursting the gas balloon, 10 May). AAP had protested the gas price, arguing that RIL was stealing the country blind; that the government had permitted RIL to extract gas from a natural national asset — the KG Basin gas reserves — and that RIL wanted to sell the very same gas back to the country at international prices.

According to the Rangarajan Committee, which submitted its report in January 2013 in which it had worked out a pricing formula for the KG Basin gas, it came to roughly $8.4 per MMBTU (million metric British thermal unit). The government is now running up a recalculation to prove that the Rangarajan Committee’s formula results in a decidedly higher price of around $9.4 per MMBTU.

The government is looking at setting the price of gas extracted by RIL from the KG Basin according to what seems prima facie a simple formula: Gas price = audited cost + margin (of 15-20 percent).

The CAG will arrive at final “audited cost” by actually auditing the cost of gas extraction not by autonomous scrutiny using statistics provided by RIL.

When the CAG had audited RIL earlier in 2011, it had wanted to do a full-performance audit (which would include spot-inspection of the site and scrutiny of the infrastructure for exploration and extraction). But the UPA government had allowed the CAG to conduct an audit only on the production-sharing contract. RIL had wanted the CAG to audit only the accounts it had submitted. Smarting a bit, the CAG reported that RIL had “gold-plated” its costs. RIL disputed the CAG’s conclusion.

At the heart of this ping-pong is that RIL has declared that the Basin contains only Rs 83,000 crore worth of gas. RIL could be priced straight out of profit by the cumulative weight of the fine of Rs 14,000 crore plus the cost of extracting the gas in the block.

Reliance sent arbitration notices to the UPA government trying to end the dispute, and previous fines for under-production. The Modi government wants the UPA government to withdraw all notices (although both sides have appointed arbitrators and the Supreme Court has appointed a third). Petroleum Minister Pradhan told Parliament on 14 July that the arbitration proceedings had begun.

SEBI ORDER
On 30 June, the Securities Appellate Tribunal (SAT) upheld a ruling by India’s market regulator, SEBI. SEBI had held RIL guilty of insider trading charges on the shares of its subsidiary, RPL, which was listed on the National Stock Exchange (NSE).

The illegally-made profit, according to the SEBI probe, is more than Rs 500 crore and market experts have speculated that the SEBI fine on RIL could be anything between Rs 500 crore to Rs 1,500 crore.

SEBI had been probing a case of insider trading of shares of RPL while it was being merged into RIL.

The charges were that RIL and others made illegal profits of more than Rs 500 crore through the alleged insider trading by short-selling shares with insider knowledge.

SEBI launched a probe into insider trading of RPL shares in 2008. The share trading period under investigation was through the month of November 2007 while RIL was preparing to merge RPL into RIL.

RIL shareholders approved this merger on 2 March 2009 and merging and demerging assets is just good business for some.

But, what had SEBI all excited was that RIL allegedly took short positions in connivance with some ‘affiliates’ and connected entities on about 20 crore shares in the NSE, making an illegal profit of Rs 513.12 crore.

SEBI sent RIL a notice on 29 April 2009 and began its investigations into the deal. In September 2009, RIL announced the terms of the merger offering RPL shareholders shares in RIL at a ratio of one RIL share for every 16 RPL shares.

On 8 October 2009, SEBI sent another notice to RIL alleging that RIL had rigged the share prices of RPL before the merger.

On 9 December 2009, RPL was merged into RIL and delisted from the stock exchange.

In 2010, SEBI informed Parliament that they would initiate proceedings to look into share trading of RPL.

Then, RIL decided to file a consent plea with the SEBI asking it to ‘settle’ the case. The rules under the SEBI Act allows SEBI to settle insider trading and other such charges with a simple fine or settlement scheme.

SEBI denied the consent plea and RIL appealed to the SAT.

While this appeal was being heard, SEBI removed ‘insider trading’ from its list of offences that can be ‘settled’ through the consent settlement scheme.

SEBI revealed that RIL-connected companies and others filed 149 consent pleas to SEBI to settle the RPL insider trading charge.

On 2 May 2013, SEBI adjudged RIL guilty of violating SEBI insider trading regulations in a 2007 investigation of insider trading in shares of another RIL subsidiary — Indian Petrochemicals Corporation Ltd (IPCL). The market regulator imposed a penalty of Rs 11 crore for the IPCL insider trading, which was under investigation since 2007.

On 30 June, SAT delivered its verdict upholding the SEBI ruling. Now, SEBI’s declaration of the penalty amount is awaited.

Haryana-Jhajjar SEZ
The Centre has also shown no apathy towards RIL’s dilemma regarding the multi-crore SEZ in Haryana.

In 2006, the Haryana government had entered into a joint venture agreement with Reliance Haryana SEZ Ltd for the 25,000-acre SEZ. The state acquired some 1,400 acres of land for which Reliance paid nearly Rs 400 crore.

Earlier this year, Chief Minister Bhupinder Singh Hooda announced that the state would take back the land for Rs 343 crore, deducting ‘administrative charges’, reportedly as per the 2006 contract. Reliance had wanted around Rs 1,100 crore for returning the land.

The matter is before the Punjab & Haryana High Court, which asked the state government why it had not penalised Reliance. It had held on to the land without developing it — apparently a common practice of several companies. Hooda had announced that it would now be used for the UPA’s ambitious Delhi-Mumbai Industrial Corridor plan.

The whole project has ended up as a sizeable loss for Reliance and there is no support from the Centre even after the change in leadership.

Notably, Haryana Janhit Congress leader Kuldeep Bishnoi and Indian National Lok Dal leader Ajay Chautala had petitioned the high court against the Haryana-Jhajjar SEZ.

CAG AUDIT OF 4G BID
The CAG is in the process of conducting an audit investigation into the auction of 4G spectrum during the UPA era. Some say it is going to be more explosive than the 2G telecom scam report which recorded a notional loss of Rs 1.76 lakh crore, but actual losses of far less than in the ‘4G scam’.

The draft report, a copy of which is with TEHELKA, reveals that RIL allegedly used a ‘backdoor entry’ into the mobile telephone sector with a loss of more than Rs 20,000 crore. A PIL questioning the 4G bid has estimated the loss at about Rs 40,000 crore.

The CAG recommends in the draft report that Reliance Jio’s licence be cancelled and all responsible be penalised, including under criminal law. But, the facts show that even the government’s role needs to be investigated by an agency such as the CBI.

Simply put, it appears that RIL used a front company to acquire broadband spectrum, meant only for providing Internet services; took over the front company and later had the Department of Telecommunications (DoT) allow it to use calling facilities over this spectrum as well. It may seem a smart business strategy but, as per the draft report, it takes away the level-playing field in the telecom industry because other telecom companies withdrew from this spectrum auction since the price seemed too high. In the end, however, Reliance Jio is sitting on some heavy-duty mobile spectrum for a small price, while others fought over 3G spectrum and lost heavily. Shortly after allocating 3G spectrum, while the 3G bidders were setting up their infrastructure, the DoT mysteriously stopped them from intra-circle sharing. It is not just the public exchequer that would be hurt by the 4G issue but all other companies in the mobile telecom sector.

When DoT began the process of ‘broadband wireless access’ or BWA (later ‘4G’ spectrum) auction, the aim was to increase user access to broadband Internet. At that time, the major players in broadband Internet were the government-owned BSNL and MTNL, the Anil Ambani-owned Reliance Communications (RComm), Hathway Cable, Tata Communications and Data Infosys Ltd. They had more than 1 percent share in the broadband sector.

In 2010, the DoT released a notice inviting applications (NIA) for both 3G and broadband, in which it clearly mentioned that the information in the NIA document was confidential and not to be disclosed.

A minor player, Infotel Broadband entered the fray. It was ranked 150th in the list of Internet Service Providers (ISPs), but the DoT terms allowed any ISP to enter the auction.

But, according to the draft CAG report, Infotel breached the confidentiality clause and allegedly acted in collusion with RIL. Infotel had a paid-up capital of Rs 2.51 crore and a net worth of Rs 2.49 crore — fitting to its status of ISP for a single client. But, it had made an earnest money deposit (EMD) of Rs 252.5 crore (100 times its net worth) and bid for all 22 circles in India for a final price of Rs 12,847.77 crore (as the draft CAG report notes, at 5,000 times the value of its net worth).

The CAG noted that the Telecom Regulatory Authority of India (TRAI) also did not make recommendations to fix financial eligibility criteria of minimum net worth and paid-up capital be fixed to disallow such collusion. Internet Service Providers Association of India (ISPAI), a lobby group, had made this recommendation to TRAI, considering that the infrastructure investment required was high. In effect, a company, with poor financial status, would not be able to acquire spectrum for itself without a sizeable financial backer.

Strangely, TRAI also increased the reserve price of the spectrum at some point, without raising the financial eligibility.

A Group of Ministers (GoM) fixed the final reserve price for this spectrum at Rs 1,750 crore, a quarter of the reserve price of the parallel 3G spectrum auction.

It seemed that the whole pitch had been effectively queered for a small, front company to bid for the spectrum.

DoT seemed as complicit because the draft CAG report notes that the department had also picked and chosen which of the TRAI recommendations to follow, despite its committees going through the recommendations.

The draft CAG report also notes that mobile telecom operators (who have a Unified Access Services licence) require a minimum net worth of Rs 1,380 crore and paid-up capital of Rs138 crore to bid for this spectrum. But, existing ISPs did not need any such financial eligibility criterion, thus, keeping out any existing mobile operators from the 4G auction.

Infotel is a small player indeed. It was incorporated in 2007 and in FY 2009-10, generated a business of less than Rs 15 lakh, for a single leased-line subscriber. As per Infotel’s financials, it had only Rs 18 lakh in its bank account, Rs 10 lakh of which was encumbered as the margin money for the ISP licence bank guarantee with DoT. The 99.99 percent owner and promoter of Infotel was Infotel Digicom, apparently a special purpose vehicle (SPV) created to own Infotel, which was later sold to RIL on acquisition of 4G spectrum.

In their financials, both companies had made full disclosures for all bank guarantees made for the ISP licence. But, in the case of the 4G spectrum allocation, the CAG found no disclosure of a bank guarantee of a whopping Rs 252 crore paid by either Infotel Broadband or its promoter Infotel Digicom.

This electronic or e-auction lasted for more that 16 days and, during this process, several bidders like RComm, Vodafone, Tata dropped out one by one when the price of the 4G spectrum started rising. However, DoT never once chose to investigate whether this small ISP, which was bidding for well over Rs 10,000 crore, had substantial worth to be able to pay that much. After all, at best, it had an EMD of only about Rs 250 crore and the dropping out of others should have red-flagged Infotel’s high bid despite its miniscule size. The EMD was worth 100 times the net worth of the company, so someone else was surely pushing funds for Infotel.

Within hours of the auction process ending, Infotel sold 95 percent of its shares to RIL and went on to become Reliance Jio Infocomm. And why not? Infotel was sitting on an Internet goldmine and how else would it pay Rs 13,000 crore.

No other player had thought of pushing for this spectrum for a few reasons. No one knew that voice telephony would be allowed with this spectrum, which was meant only for Internet. Besides, all other players had focussed on acquiring 3G spectrum and they are still paying interest out of their noses for the high amount they paid as reported in a story published by TEHELKA (The network has gone bad, 10 May) Now, RIL, through Infotel, acquires this pan-India spectrum for around a sixth of the cost that others paid for 3G.

Anand Nahata, who was promoter-director of Infotel Digicom, gave an interview to a TV news channel on 11 June 2010, saying that he had been discussing RIL’s acquisition of Infotel during the auction. This was despite the confidentiality clause and the CAG noted, in its draft report, that it could have helped this company to continue bidding for 4G spectrum despite major players dropping out.

In fact, on the afternoon of 11 June, shortly after winning the spectrum bid, Infotel held an extraordinary general meeting amplifying its share value by 2,000 times from about Rs 3 crore to Rs 6,000 crore.

The takeover by RIL made headlines in business newspapers the next day but DoT did not inform the government that it was possibly a rigged bidding. The government could have halted the auction at this point and investigated it, had DoT pointed this out.

Neither DoT nor the committee of finance, telecommunication and Planning Commission secretaries seemed to have noticed the news headlines, but the CAG read them.

At about this time, Infotel was also busy issuing shares in its companies against its newly-acquired wealth of 4G spectrum. RIL spent more than Rs 4,000 crore acquiring these shares and Infotel also changed its name to reflect that of a public company — in effect, to show it was preparing for listing.

This seems a throwback to 1995 when Anant Nahata’s father Mahendra Nahata also bid for nine licences of 2G spectrum. Eventually, they could not pay and the then telecom minister Sukh Ram had to bail them out.

The CBI had probed Mahendra Nahata in the multi-crore 2G spectrum scam having procured a telecom licence through Himachal Futuristic Communications Limited (HFCL).

Reliance Jio, in one of its replies to the auditors, says that the eligibility criteria “is a policy decision for expansion of services at affordable rates for the common man even in rural and remote areas”.

One such not-so-common man was Nahata who walked away with what the CAG calls “windfall gains of Rs 4,800 crore”. Deja vu, anyone?

In 2011, Infotel (then owned by Reliance) applied for mobile country code (MCC) and mobile number code (MNC) to DoT. This means that it wanted voice telephony services on spectrum meant for Internet data only. DoT had in 2008 and in 2010 clarified that voice calling was permitted only on 2G and 3G spectrum. Infotel said it wanted this service to provide data services on the LTE (long-term evolution) platform.

In May 2012, a DOT committee initially held that the reserve price for 3G and 4G spectra were different, eligibility conditions were different, the technical specifications for the carrier of both spectra were different and there were several other differences in the 3G and 4G spectrum and their respective bidding process. It would not have created an even-playing field and DoT noted, “Post-auction interpretation of such nature may not be appropriate and would cause controversies in the sector.” There was also a great difference in the licence fee.

But, in February 2013, the situation was reversed and a second committee, with several senior DoT officers allowed converting Infotel’s ISP licence to a UAS licence, which would allow them to add voice calling. Infotel had to pay only the difference in fees for the ISP and UAS licences.

In 2010, the UAS licence holders had paid Rs 1,658 crore as an entry fee for the 3G spectrum allocation. The ISP licence holders had paid only Rs 30 lakh. So, all Infotel (or RIL) had to do, according to the DoT, was to pay Rs 1,658 crore and it would be at par with other telecom players via a backdoor entry. This, despite a Supreme Court ruling that led to cancellation of 122 licences awarded by DoT in 2008 using this same price that was discovered as far back as 2001. Subsequently, telecom companies have paid around Rs 11,000 crore in fees for 2G spectrum licence fees in 2012-14.

Superficially, it might also appear a smart business move to enter the telecom sector and earn a few pats on the back from RIL’s shareholders. And, telecom is not just another way for RIL to earn money. It is dear to its promoter Mukesh Ambani.

“Before the division of the family business between the two brothers in 2002, Mukesh Ambani was deeply involved in every nuance of the industry and would also spend time discussing innovations with technology experts in Reliance’s communication wing. He took direct interest in every aspect of telecom development and innovation,” says a former Reliance insider.

However, it is not just backdoor entry, what the government has to consider here is that this is a critically-ill sector where several companies have staked thousands of crores of rupees and recovery is nowhere in sight after scams, high 3G spectrum auction price, high infrastructure costs, bank loans and interest payments. But, DoT seemed to be keen to oblige RIL/Infotel.

In the draft CAG report, it estimates that RIL has possibly benefited by Rs 22,842 crore thanks to DoT. This has a bearing on the 3G spectrum price as well because if calling on the broadband spectrum was to be allowed, that would have changed the base price for auction of both spectrum and all telecom companies would have placed their bids strategically. DoT has cited “changing technology” as its defence for making this change.

And to top it all, BSNL and MTNL surrendered their broadband spectrum, leaving Reliance Jio as the sole large player in 4G services. All of this happened under the watch of Kapil Sibal, telecom minister of the Congress-led UPA government, who succeeded the controversial A Raja.

In its draft report, the CAG has recommended, “The government should get the matter even at this juncture, fix responsibility on the bidders, which violated the auction conditions/rules prescribed in the NIA and cancel the allotment of BWA spectrum along with exemplary punishment on colluding firms.”

The Centre for Public Interest Litigation (CPIL), run by senior advocate Prashant Bhushan, has filed a public interest litigation (PIL) petition before the Supreme Court. The CPIL has calculated the total loss to the exchequer to be Rs 40,000 crore, considering that DoT has also failed to revise the Spectrum Usage Charges (SUC). In effect, other telecom companies pay 3-5 percent of its revenue as SUC, but Reliance would pay only 1 percent.

As per the CPIL petition, “A committee of the DoT rejected the proposal of allowing voice telephony to Reliance not once but several times, but in the end this committee was disbanded and a new committee under the chairmanship of secretary (telecom) was formed who was due to superannuate two months later (in March 2013). Post-superannuation, on 10.06.2013 he was rewarded with the post of chairman, National Technical Research Organisation (NTRO).”

The said telecom secretary is Rentala Chandrashekhar, who is now to lead NTRO, India’s sensitive technology wing of its security apparatus.

In its reply to the auditors, Reliance has mostly used the DoT’s 2013 amendment of its rules for granting unified licences. According to the amendment, spectrum allocation is no longer linked with licence and the “pan-India unified licence covering all services comes at a cost of only Rs 15 crore as entry fee”.

Therefore, according to Reliance, a payment of Rs 15 crore and another of Rs 1,658 crore would migrate any ISP to a pan-India licence after buying more spectrum than other telecom companies for 3G, that too, at a fraction of the cost of 3G spectrum.

This seems to be conveniently retrospectively amended after Reliance had acquired a huge amount of spectrum in the 4G auction and applied to DoT for allowing voice calling services.

Reliance also said in its reply to auditors that 4G popularity is less than 10 percent of 3G usage, which makes the handsets and equipment for 4G a lot more expensive than those of 3G. Hence, according to Reliance, 4G spectrum and its price could not be held at par with 3G spectrum price.

However, once 4G services are rolled out, providers could call for portability to its services and most smartphones using 3G would be able to connect with 4G too. It is important to note that RIL has spent several thousand crores on the infrastructure. Other companies have also bought spectrum (3G) at high costs, all have invested heavily in infrastructure and this has increased the cost of using 3G data services.

Industry experts have been waiting to see how Reliance Jio would make 4G profitable, considering the 3G revolution flop, wondering why the elder Ambani brother decided to enter this sector. So, even the government needs to tread carefully because eventually the burden would fall on the consumer.

But, before that, RIL may well have to submit to a court-monitored investigation into the 4G spectrum bids while the CAG has already recommended cancellation of licence and penalising Reliance and others involved. Will this government bail it out of an apparent mess up by the UPA government?

There is no doubt as to how the UPA-1 and 2 obliged RIL through various policy decisions in its favour even as it was exiting office a few months ago. As of now, Modi seems to be taking a stronger line of a broader vision. Will it sustain?.

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