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Friday, February 3, 2012

Telecom Licenses Cancelled

This post is only about remembering the past, and no ideas or opinions are presented here.

Yesterday, Supreme Court decided that all 122 telecom licenses issued by the government after Jan 2008 should be terminated as it found the process illegal. It was an unexpected decision. Many experts were of the opinion that collectively, these 122 networks were too big to be allowed to fail, a customer base of about 70 million, and an investment of more than 5 billion dollars. So, even if the process was illegal, the courts may find a way to penalize the licensees (like asking them to pay a much higher price of the license). But that was not to be. I am sure we haven't seen the end-game yet. The telecom companies will definitely seek a review by a larger bench.

About 10 years ago, a similar case was being fought in TDSAT. Reliance Infocom had been charged with violation of license conditions. They were effectively offering mobile service with the basic service license, which allowed something called, "limited mobility." The problem was that this case had caused an uncertainty in the market, and the fresh investments in the telecom sector were difficult to come by. The telecom industry was not growing at the pace it was expected to or should have. Everyone wanted this case to be disposed off quickly.

I recall that IIT Madras had organized a workshop around 1st February, 2003, as part of National Communications Conference, titled, "201 million connections by 2010." The workshop goal was to identify research challenges and strategies to solve them so that telecom  equipment cost comes down to a level where it becomes affordable to a common Indian, and we could have 201 million connections by 31st December, 2010. A lot of telecom experts were there, and so were economists, sociologists, who gave us all kind of data about  disposable income, income distribution, the value that a poor or middle class Indian has for voice, and at what price point, such a person will become a subscriber to the telecom service. We were told about the standards that China was creating, the research its companies were doing, and so on.

Almost at the end of the deliberations, I requested that I be allowed to speak for a few minutes, which I was. My point was simple. If Reliance wins the case, and TRAI were to force free incoming calls (recall we had to pay for incoming also till 2003), then we will have 201 million connections by 2008, without any additional support by the Government. My argument was roughly the following. We are looking at 17-18% tele-density in 2008. When did China achieved 17-18% tele-density. What was the per capita income of China at that time. At 6-7 per cent growth rate, when will India have that per capita income. And from the numbers that people from economics background were giving in that workshop, I estimated that year to be 2008.

But this will happen ONLY if the regulatory environment in the two countries is similar, and the business confidence is at a level where some one is willing to invest in the sector. For boosting business confidence, the Reliance case had to be solved. And the regulatory issue was to have free incoming.

I also thought about another issue which I was too afraid to speak out that day. The telecom equipment prices had crashed in this period. So India should achieve 17-18% tele-density at a lower per capita income than China did, and I wanted to say that India will achieve 201 million connections in 2007, but felt that people will not take me seriously if I were to say that. Not that many took 2008 seriously. There was an uproar, a lot of personal remarks. What did I know about socio-economic factors. China had more equitable distribution of wealth compared to India. The cultures are different, they value voice differently. They have their own telecom standards. And, here I was, without understanding anything about either economics or technology, based on some rough back-of-the-envelope calculations, "challenging" all the experts. I must have also been anti-research.

(And just for the bragging rights, very soon the Reliance case was solved, and TRAI made the free incoming, and India did have its 201st millionth connection in 2007.)

There was one gentleman in the room, who was from DoT, and who sensed that I might be right. We started talking. He gave me an interesting perspective. If Reliance won the case with 3-0 margin, government would be under political pressure to challenge the verdict in Supreme Court. If Reliance were to lose the case 3-0, then they would obviously go to SC, and politically, government would not be able to engage them in an out-of-court settlement. So the best solution would be that the case is decided by a split verdict, and then government engages Reliance in some negotiations, and they agree to pay a few thousand crores, which they will, rather than fight it out in Supreme Court, and continue with an uncertain business and policy environment. (This is exactly what happened.)

My back-of-the-envelope calculations were of so much interest to him that he arranged my meetings in Delhi with the Minister (Mr. Shourie), Secretary, Department of Telecom, and Chairman, TRAI. (I don't know why he wanted me to directly explain to them that paid incoming and the Reliance case were the bottlenecks in the growth of telecom industry. He could have done it himself. And, in any case, there were enough people in the country who were saying the same thing.)

But the sense I got from this gentleman and other bigwigs was that everyone believed that Reliance was too big to fail. That notwithstanding Reliance's legal position, which apparently was reasonably strong, courts would be sympathetic with a 10,000 crore investment.

And based on that feedback, 9 years ago, I was expecting the court to be sympathetic with Rs. 25,000 crore investment, and find a way out to legalize the process, if they found it illegal. While an individual license was small, but as a sum total, these 122 licenses were assumed to be too big to fail. But predictions by non-experts can only come true once in a life time, not twice.

It would be interesting to watch, what next.


Saurabh Nanda said...

About 10 years ago, a similar case was being fought in TDSAT. Reliance Infocom had been charged with violation of license conditions. They were effectively offering mobile service with the basic service license, which allowed something called, "limited mobility." The problem was that this case had caused an uncertainty in the market, and the fresh investments in the telecom sector were difficult to come by.

Any link where one can read more about the case mentioned above? It'd be great if you could make an expanded summary part of this post itself.

Vivek Nirkhe said...

Dheeraj, this does not bode well for the business climate. Realization that a contract with the government of India may not be valid is a scary situation.

I do hope that the licensees who paid bribes go after those ministers to get the bribes back or the names come out!

Dheeraj Sanghi said...

@Saurabh, Here is what happened. (Details may have some errors, but in abstract, this is what happened.) The Cellular Mobile Telecom Service (CMTS) licenses were expensive, while the Basic service license were cheap. The government at the time felt that basic service must be promoted, since that was likely to be cheaper, and it would also enable easier Internet penetration at a later date. Reliance went for basic service license.

Wireless in local loop (WLL) was permitted in basic service license, which meant that the last mile could be wireless. But the expectation was that the wireless phone at home would be "connected" to the same base station, and there would therefore only limited mobility for the phone. It could only be moved within the area served by that base station. So I could go with my phone only within a couple of KMs. at most.

Reliance did many interesting things. First of all, it claimed that switching from one base station to another was allowed - that the phone was not "connected" to the base station, but some "master switch" and therefore "limited mobility" meant the zone covered by that master switch. With this argument, I could take my phone to any part of the city.

The second thing they did was to argue that when I travel from Kanpur to Lucknow, and I switch on my phone in Lucknow, that act of switching on the phone amounts to applying for a basic phone connection in Lucknow. Since all the "Know Your Customer" requirements are already fulfilled by me, Reliance is able to provide me with a telephone connection instantly through software.

Third, since I have been a good customer of Reliance in Kanpur, when I go to Lucknow and "apply" for a connection there, Reliance would be happy to keep my Kanpur number alive for me to take it back when I return to Kanpur, and during the period I am Lucknow customer of Reliance, provide me with free call forwarding from my Kanpur number to Lucknow number.

As a further customer friendly company, Reliance would not even inform me of my Lucknow number, since they know I am in Lucknow only temporarily and even inform the people whom I call only my Kanpur number.

In this fashion, they were able to provide the same service as Bharti or others were doing, but Bharti was paying a much higher cost of license then Reliance, and Reliance could sell its services cheaper as a result.

DoT was not amused by these interpretations of the licensing conditions, and filed a case in TDSAT, which is a 3-member body. Reliance won the case 2-1, but interestingly the lone dissenter was a retired Justice. So, even though the government lost the case, it could tell Reliance that amongst the three members, the legal expert had opined against them, and if the matter went to Supreme Court, there will only be justices in the bench and they are more likely to think like this one dissenter than the other two members. So the chances were that Reliance would lose the case in Supreme Court.

Reliance interest at that time was to do business peacefully. They wanted to grow their business. But did not want to invest more unless they were sure that a court will not nullify all that investment. They figured that paying a few hundred crores would be better than to take the chance of fighting it out in Supreme Court, and losing. And even if they won, they would have lost so much because of the lost opportunities in this period.

Dheeraj Sanghi said...

@Vivek, This is not just another contract with Indian Government. In this case, right from day one, there have been court cases, media reports, expert opinions, on whether the licenses were given away legally or not. The foreign companies who invested in India valued these licenses at an order of magnitude higher number than what the companies originally had paid for them a few days earlier. Did they not think that someone is going to ask questions if the valuation goes up by 10 times or more within days.

I am sure all the foreign companies would have hired enough lawyers and others and then must have come to the conclusion that there is a legal and political risk in this investment.

And, of course, when one takes risks and succeeds, they will go out and praise themselves for discerning a business opportunity, and managing risks appropriately, and so on. But when one fails, then no one is going to say, oh well, we took the risk and failed, but that the system is wrong.

So, a failure in this case would have zero or very little impact on foreign investment in India, since this case was considered hugely risky from day one.

(And, of course, as I said in my blog, we haven't seen the end-game yet. I am sure companies will go for judicial review, and there may yet be surprises.)

But then I am not an expert in these things.

Saurabh Nanda said...

Thank you for the detailed explanation Dr. Sanghi. I agree that Reliance was violating the spirit of the regulation, if not the letter. However, weren't the limits just too 'artificial'? Very similar to DRM -- systems have the technical capability to copy a file, the cost of copying the file is virtually zero, but someone somewhere doesn't *want* you to copy the file.

[rant]And I'm saddened that there is such a hue & cry about the 'potential loss of revenue' with respect to an 'artificially created resource' -- bandwidth & spectrum. But no one bothers about the continuous loss of a *real resource* -- our natural forests & water bodies. [/rant]