A sweeping Supreme Court judgment and a bungling government have made a messy situation messier. Ashish Khetan explores why this is a difficult moment for Indian democracy
ON 2 FEBRUARY, IN A HISTORIC VERDICT, THE Supreme Court cancelled 122 2G licences allotted by former telecom minister A Raja. Besides cancelling the licences, the court also directed the government to auction the new 2G licences. Going a step further, in a sweeping statement, the court also ruled that broadly “while transferring or alienating the country’s natural resources, the State is duty bound to adopt the method of auction” because it holds these resources in “public trust”.
Barely a couple of hours later, the incumbent Telecom Minister Kapil Sibal hurriedly convened a press conference and announced that his government welcomed the Supreme Court ruling which, according to him, would help remove the uncertainty clouding the telecom sector.
The two events taken together mark a troubling crossroad for Indian democracy. Given the long, sordid and high-profile nature of the 2G saga, the court verdict certainly came as a welcome moment of catharsis and clarity; a much-needed show of retributive justice. However, the verdict is not as simple and clear-cut as it first seems and is going to have giant ramifications. It is likely to trigger a huge policy upheaval, a mountain of fresh litigation and loss of jobs. It will potentially write off thousands of crores of rupees of investment, consume the lifelong savings of thousands of shareholders and further vitiate an already dismal investment climate. Given this, there is a gathering cloud of anxiety behind the applause over the verdict. But more on its impacts on the telecom sector later.
The really worrying aspect of the Supreme Court’s 2G verdict is not the striking down of the 122 licences or even some of the unfair fallouts and fresh litigious mess that might flow from it. The really worrying aspect is the growing signs of judicial overreach in the country coupled with — in fact, actively triggered by — the abject capitulation of the executive.
The Indian Constitution has wisely separated and defined the functions of each of the institutions of democracy: the legislature, executive and judiciary. It is this separation of powers and functions that preserves the health of our democracy. However, the 2G verdict seems to have breached that separation. In ordering the government to auction the new 2G licences, the court has not only struck down the old policy on the grounds of its lack of transparency, due process, corruption and preferential treatment, it has also insisted on broadly formulating the new telecom licensing policy.
Even if its direction proves to be the most efficacious, clearly, this should not be the domain of the courts. However, even though the UPA government had been defending its old first-come-first-served (FCFS) telecom policy for three years, maintaining that the problem, if any, lay in its execution, on 2 February, at Sibal’s conference, it made a sudden and meek turnaround and embraced the new policy postulated by two Supreme Court judges, expressing gratitude to them for bringing clarity into the sector.
This marks a limp surrender by the government of its core constitutional responsibilities, which is to shape policy and provide effective and efficient governance. While accepting the verdict on the failings of its old policy in conception and practice, the government should have asserted its constitutional right to go back to the drawing board, consult stakeholders and formulate new policy. Its failure to do so marks a new low in a series of malfeasant lows and misgovernance by the UPA.
The court’s further pronouncement on natural resources in general is one step deeper into this dangerous quicksand of judicial overreach. Undoubtedly, the judicial assertion that “natural resources” should be held by governments in “public trust” and disbursed judiciously for the greater common good is a very welcome and timely reminder for governments of every hue, both at the Centre and state. However, its over-simplistic formula that allocation of natural resources must always be through auction is going to have massive and far-reaching implications. But instead of challenging this aspect of the order and reclaiming its legitimate constitutional domain, the feckless UPA government seems happy to retreat even further from its duties.
In a sense, therefore, the 2G order exemplifies the dreadful state of inertia and policy paralysis this regime is suffering from. The government’s extreme rudderlessness is creating a vacuum that the judiciary cannot help but step into as, confronted by this unprecedented governance vacuum, more and more people are taking the battle for their rights to the courts. However, while the Indian Constitution provides for judicial review of executive action and even to nudge the executive into action, it is highly undesirable for the courts to step into the shoes of the executive and start governing the country.
“The price of resources has unquestionably to be determined in a manner that is transparent,” says constitutional expert Harish Salve. “It is the duty of a constitutional court to ensure that decisions of policy are taken honestly and in a manner that is transparent. In other words, the constitutional court controls the decision-making process. But in the present case, the court has gone a step further and controlled the decision itself.”
“This principle of market-driven prices being applied across the board can lead to interesting consequences,” he continues. “Crude oil produced by ONGC is as much a national resource as spectrum. This is supplied at subsidised prices to oil companies who in turn produce downstream products and sell them well below market prices. Gas produced by Reliance, for instance, is price-controlled and not sold at a market-determined price. If this gas is sold at market prices, then the electricity generated by private consumers will be possibly three times as expensive. Roads too are used at rates often well below market price. So while auctions may often be the preferred route, it cannot be the only route.”
“Policy making is a very complex process,” agrees Vinod Dhall, former Competition Commissioner of India. “I think there are various factors that need to be taken into consideration before a policy is adopted. It may not be feasible for the court to decide. Policy making is not so simplistic. However, competitive bidding should be the default position. There could be times when you say, look, competitive bidding is not the appropriate method because of the following reasons. But those reasons should be recorded. They should state why they are deviating from the default position.”
Thoughtful and equitable utilisation of scarce and precious natural resources holds the key to the kind of sustainable and inclusive development that is crucial for the country. But the UPA’s skewed economic policy has wooed investment even when it came at the cost of environmental degradation, disfranchisement of large sections of the country and inordinate profiteering by corporations.
Reeling under scams — most of them centered on the sale of natural resources — the government appointed an expert committee headed by former finance secretary Ashok Chawla in January 2011 to suggest reforms in the way government allocates key natural resources. The report submitted in May 2011 did not favour a uniform policy of auction for all kinds of natural resources.
“The policy of transferring or alienating natural resources has to be linked with a demand-supply matrix, among other factors,” Ashok Chawla, who is now the Competition Commissioner of India, told TEHELKA. “Where there is much more demand than supply and there is no over-arching public policy objective of giving any benefit to the end users and it is to used for a purely commercial objective, then certainly the most efficient way of determining the embedded value of a natural asset is through an auction. But we also came across cases where the government needs to subsidise certain commodities as part of its public policy. So auction or no auction is not the key issue, the key issue is complete transparency and fairness in the method adopted.”
Transparency does seem to be the only key one can safely insist on. Eight years of UPA rule have been marked by the corrupt, inefficient and inequitable use of natural resources. However, clearly, auctions cannot be the only answer as the Supreme Court has directed. The experience on ground shows that dishonest dispensations — both in the Centre and state — can rig even auctions in favour of select private players. Ironically, in fact, some of the deals that were apparently signed after competitive bidding have turned out to be among the most scandalous.
As this story went to press, news began to come in that Prime Minister Manmohan Singh might now want to seek a review petition of the Supreme Court’s 2G order. Couple this with Sibal’s earlier press conference and various government spokespersons’ assertion this past week that they would not seek a review, and the towering confusion within the executive becomes even more apparent.
Between the persistent and often mala fide policy bungling of the government (especially in crucial sectors such as land, mining, oil exploration and coal) and the simplistic policy directives of the Supreme Court, the country is being pushed in precarious directions. Here, then, is an account of how this strangely troubling judgment — both welcome and unwelcome — is likely to pan out in the telecom sector.
AN INDISPUTABLE positive of the Supreme Court order is that the Rule of Law has been upheld. A strong message has gone out to both industry and government that crony capitalism will not be tolerated. Corrupt business deals facilitated by a collusive government will be subjected to judicial scrutiny. However, riding hard on the tail of this relief is the legitimate fear that the order has an element of judicial overreach that might prove detrimental to the public good in the long run.
The anxiety shooting through industry and government is that the new telecom policy should have been formulated after taking various complex business and consumer-related issues into consideration. A fair and reasonable policy could have been devised only after such a consultation. The Supreme Court order, however, has now put the cart before the horse. But it is primarily the government that is responsible for this thorny situation.
Consider this: Over the past two years, until the 2 February order, the incumbent minister Kapil Sibal had consistently maintained that the first-come-first-served policy was for the larger good. By adopting this obdurate position, the government forestalled any corrective action and it was left to the Supreme Court to clear the mess. The fact is these licences should have been cancelled three years ago, in July 2009, when the Delhi High Court had quashed the Department of Telecommunications’ (DoT) 10 January 2008 press release — which was the basis on which the 122 2G licences had been issued.
The high court order was the result of a petition filed by S Tel, the telecom joint venture between Chennai-based Siva Group and Bahrain Telecom, which claimed that it was denied licences in 16 circles because of the arbitrary change of cut-off date. But the DoT (then headed by Raja) went into an appeal before the division Bench, where Attorney General GE Vahanvati argued for the DoT, but lost the case on 24 November 2009. The DoT then appealed before the Supreme Court but before it could deliver the verdict, the DoT and S Tel seemed to have struck some kind of a deal. Consequently, S Tel filed an affidavit before the court saying it was no longer interested in the 16 licences anymore. This was March 2010. It was reported at the time that Raja had arm-twisted S Tel into dropping the case. Thus the government could save the licences only by resorting to skullduggery.
When Sibal took over, he asserted that there was zero loss from the allocation of 2G licences and thus refused to take preemptive steps, despite the advice of both the CAG and TRAI who had recommended cancellation for various violations of UASL guidelines. After a considerable delay, Sibal did issue notices to 74 licencees last October but the follow-up action is not known. Now with the court’s cancellation order, the minister is left with a mountain to climb.
The really worrying aspect is the growing signs of judicial overreach coupled with — in fact, actively triggered by — the executive’s capitulation
Firstly, Sibal will have to devise a mechanism to take over 500 MHz of spectrum from nine companies. He has to take a decision whether the businesses of the companies should be closed before the auction is called or should they be allowed to operate till the outcome of the bid is known. Uninor executives told TEHELKA that if the government decided to cancel their licences before allowing them to bid, they would rather pack up and leave. “The cost of customer acquisition is about Rs 300 per customer. Today Uninor has a customer base of around 40 million subscribers. We can’t imagine building up this base again if our business is dismantled,” said a senior Uninor official.
The total ballpark investment made by the affected companies comes to roughly Rs 43,000 crore. Norwegian telecom company Telenor has so far invested Rs 14,000 crore. UAE-based Etisalat has invested Rs 8,000 crore, Russian government promoted Sistema has poured in Rs 12,000 crore, S Tel Rs 1,500 crore, Loop Rs 2,000 crore and Videocon around Rs 6,000 crore. Many of these operators, even if they decide to bid, may not win the licences and the spectrum. The government will be forced to compensate those who fail in the bid and the loss then would be not notional but real.
“The issue of appropriate relief was argued before the court. We pointed out that scrapping the licences when large investments have been made — and that too investments made by foreign investors who were not party to the executive’s misdemeanors — would in the long run prove contrary to public interest,” says Harish Salve, who represented Tata before the court. “The perception this order will create is that there is a huge gap between the Indian government and the Indian court and investments in India are unsafe as the recourse of judicial review might render them a wasted expenditure. This, in the ultimate analysis, might cost us a lot more than what the country lost by not auctioning the spectrum.”
“The government should refund the money. What if the foreign collaborators come and sue the government of India? They will argue that they acted on a legal licence, stamped by the government of India, which is not merely a piece of paper,” says senior Supreme Court lawyer Mukul Rohtagi, who is the counsel for Essar-Loop and Swan Telecom.
There are other booby-traps waiting to explode. The Supreme Court order has struck down the FCFS policy per se. However, all telecom licences since 2001 have been allocated under the FCFS policy (NDA’s telecom minister Arun Shourie issued 26 licences; Dayanidhi Maran issued 25 licences). There is a fear that the order might lead to more litigations praying for cancelling all the licences issued between 2001 and 2008. The court has made it clear that it had not dealt with the old licences only because they were not parties to the petition. If such petitions are filed, it would lead to a monumental mess, potentially far bigger than what exists today. The government clearly has no strategy for such an eventuality.
Telecom experts also fear that the licence cancellation would have a long-term impact on India’s image as an investor destination. There is also a danger of soured bilateral relations: both the Norwegian and Russian government, for instance, have substantial stakes in Telenor and Sistema.
“The licence cancellation is bound to have huge ramifications because investor confidence is bound to be shaken,” says ASSOCHAM Secretary General DS Rawat.
The verdict is likely to trigger a huge policy upheaval, fresh litigation and loss of jobs, and further vitiate an already dismal investment climate
Another industry analyst who preferred to remain unnamed says, “This is undoubtedly going to be a huge crisis. Mr Sibal should be on a plane by now, approaching foreign telecom players, asking them what it would take to attract them to invest money in India. Secondly, foreign investors would need more than four months (the deadline set by the Supreme Court) to come up with a business plan, find a domestic partner, etc.” If foreign telecom companies don’t participate, the 2G auction may turn out to be a damp squib.
There are innumerable other challenges. If several companies are forced to shut shop, several thousand employees stand to lose their jobs. The DoT also has to come up with an investment-friendly merger and acquisition policy. Both incumbents and new players need to be allowed to consolidate. The DoT will also have to decide whether incumbent players like Bharti and Vodafone can also bid for additional spectrum. If yes, what should be the quantum?
The DoT also has to strike a balance between revenue maximisation and consumers’ interests. Since the 2008 licence allocation, call rates have dropped substantially The average call tariff in early 2008 was 70 paisa per minute. Today it’s around 40 paisa. Uninor and Shyam-Sistema offer the lowest rates. (Under certain plans, Uninor offers as low as 5 paisa per minute.)
Given this competitive race, the average revenue per customer of all telecom companies has dropped substantially since 2008. The entry of new players like Uninor, Sistema and Docomo has brought immense pressure on the old players to reduce their tariffs. But since the new players have limited spectrum, they have not been able to make a dent in the high-end subscriber base (which prefers better network coverage over low tariffs).
TRAI recently reported that three of the older players have been acting as a cartel and hiking tariffs in a synchronised manner. To honour the Supreme Court order, the DoT will have to ensure that the bidding does not result in spectrum holding by old players, who might fork out unrealistic price to block the entry of new operators.
The question everyone is asking is, is four months enough time to work all of this out?
SECTIONS OF the media and concerned citizens across the country may be discussing the problem of judicial overreach triggered by the 2G judgment. However, this is really a wake-up call to governments both at the Centre and states. Not just in the telecom sector, but in several crucial sectors such as land acquisition, mining and oil, the government’s repeated policy failures and mala fide actions may soon leave the country with no option but to turn increasingly to the courts for policy interventions and guidelines that should strictly belong to the executive domain.
The woefully inadequate Mines and Minerals Act is a telling case. The management of mineral resources is the responsibility of both Central and state governments and the colossal mining scams in Jharkhand, Odisha, Goa, Karnataka, Rajasthan and Haryana can justifiably be placed at the door of the respective state governments.
However, the Centre is also highly culpable for not tightening the regulatory and legal framework of the mining industry. “The UPA didn’t raise the rate of royalty fixed by it under the Mining Act for five years, even though the international price of iron ore had increased 20-fold in that time,” says Arun Agarwal, the famous Bengaluru-based anti-corruption activist (it was on Agarwal’s complaint that the Central Vigilance Commissioner initiated the 2G probe in 2008).
The Justice MB Shah Committee formed to inquire into illegal mining had recommended a complete ban on the export of iron and manganese ore to curb illegal mining. The government has still not implemented this recommendation. “The Centre should have totally banned iron ore exports or at least restricted it since it’s a non-regenerable source,” says former Karnataka Lokayukta Justice Santosh Hegde. “In my first report, filed in 2006, I had mentioned that going by the rate at which iron was being extracted, we would be able to mine for 30 years. But within two years of that report, the rate of illegal mining had compounded so much I estimated our ores would not last more than 15 years. The Centre has to take a sustainable view. Otherwise there will soon be a time when we will be buying finished products from China,” he says,
However, the amended but still deeply flawed Mining Act is still waiting for clearance.
THIS STORY repeats itself endlessly. Despite innumerable and desperate people’s resistance movements on the ground, the infamous Land Acquisition Act was not amended by the Centre until it was checkmated by the Mayawati government, which brought in its own version of the Land Bill with various pro-farmer provisions. The UPA finally sent the draft of its new Bill to the Parliament’s standing committee in September 2011, but it is still not passed.
The amended Bill is again a poorly thought instrument. The Bill that Jairam Ramesh (who took over as Rural Development Minister in July 2011) and his team first drafted and the one that was eventually sent to the Parliament’s standing committee were not the same. The first draft proposed that farmers get six times the market rate as compensation for land being acquired. The conditions for acquiring land and the definition of public purpose were also clearly outlined. However, in the final draft crucially, the definition of public purpose was omitted. Was this a deliberate ploy to leave open a space for policy manipulations?
The compensation for farmers in the new draft was also brought down from six times the market rate to three times. Civil rights groups working with displaced farmers are raising a legitimate point: if the rate of compensation is already fixed, where is the room for farmers to decide the price of their land? And more importantly, what happens when the farmers just do not want to sell? Civil society leaders feel the UPA has given in to pressure from corporate lobbies and so a Bill meant to protect the rights of the farmers and tribals has ended up serving corporate interests.
But is auctioning the only answer to all this policy inertia and bungling? In the case of mining, the new Bill has sought to have competitive bidding for licences to mine known ores. However, it has opted for a first-in-time model for areas when mineralisation is not known. Will the court order now force this to be scrapped? If so, no one may come forward to risk bidding for an untapped mine. Alternatively, only a very few and very rich entities may end up cornering all the contracts, by out-bidding newcomers.
Former Solicitor General Gopal Subramanium has a nuanced position on this dilemma. “Unless there is a policy founded upon rational criteria, which can demonstrably show that auction is not an advisable route, any natural resource of the government cannot be allocated in favour of private interests without a reasonable basis. Hence any exception to the auction route needs to be well presented. It is true the issue of choices in economics is complex and is not free from opinion. There can be many different views; therefore, you have to look for common rational parameters.”
However, auctions or competitive bidding is by no means a foolproof parameter. A case in point is the government’s natural gas policy as demonstrated in the KG-D6 Deepwater Block, India’s largest gas discovery till date. The block was awarded to a consortium headed by Reliance Industries Ltd (RIL) in 2000, through a competitive bidding process, which was followed by a production sharing agreement with the government. The contract was structured in a way that it first allows the contractor to recover his full cost and then the government’s profits — which is 80 percent of total profits — kicks in.
“The objective should have been maximum production at minimal cost. But there is nothing in the way the KG-D6 block production sharing agreement has been structured, which was signed after competitive bidding, which would meet that objective,” says Surya Sethi, former principal adviser (energy) to the Planning Commission.
In 2004, the UPA government had approved the first initial development plan submitted by the RIL with a projected total capital expenditure of $2.39 billion. By December 2006, RIL had increased this figure to $8.8 billion, which was approved by the petroleum ministry. The justification for quadrupling the capital expenditure has not been explained.
“A committee of four people approved the hike in capital outlay. Now there is no formula or methodology laid down in the contract, which would tell you whether $2.4 billion was correct or $8.8 billion is correct,” says Sethi. “If you push up the cost exponentially, by the time the cost is fully recovered, there is no gas left in the basin to share the profits with the government. So giving the government 80 percent of zero is still zero,” says Sethi. The CAG has raised several queries on this.
The UPA’s rudderlessness is creating a vacuum that the judiciary cannot help but step into as more people are taking their battles to the courtroom
In another case, anti-corruption crusader Prashant Bhushan is all set to take the recently approved Cairn-Vedanta deal of acquiring the Barmer oil field to court. “The estimated reserves is said to be in the region of 6 billion barrels from the Barmer oil field alone. This translates into a revenue of $600 billion. Why should these valuable oil reserves be transferred by the government for around $7 billion, a fraction of its actual value, to Vedanta when the government-owned ONGC has the right of first option of purchase?” Bhushan told TEHELKA.
All of this is collective proof that India stands at a very difficult moment in its journey. Unless governments can find the will and ethical vision to work for the greater public good, it appears sweeping judgments from the courts will not necessarily fix things. Too often, it may only be a case of exchanging one bad situation for another.
If there is one collective lesson that can be drawn from the 2G saga, it is to push for non-negotiable transparency in all transactions that involve the allocation and use of national resources. If anything can ensure that these are genuinely held in “public trust”, perhaps transparency can.
With additional reporting by G Vishnu and inputs by Revati Laul and Imran Khan
Ashish Khetan is Editor, Investigations with Tehelka.