Reality Check India

2G Scam – The arbitrary and capricious policy test

Posted in Uncategorized by realitycheck on September 28, 2011

It looks like the government is going to brazen it out and here is the grand strategy.

There is no scam because what was executed was exactly the policy of the UPA government.

What about the gigantic loss pointed out by the CAG, you might ask ?

There was no loss because the policy was never to make money. Put another way, the so called “loss” you talk about is factored into the policy agreed by the then duly elected Congress Finance Minister , Prime Minister and A. Raja and D. Maran of the DMK.

If you are like me, you would come away with Maybe the policy itself is the scam ?”   Can you call a policy decision a scam – isnt it sacrosanct  ? That is the topic of this blog.

I know the United States is not India, but here is how they deal with challenges on policy decisions. If an agency (such as DoT/TRAI) makes a decision with as far reaching revenue implication as the 2G auction it must be prepared to pass scrutiny. You cant forward a post facto ‘electromagnetic social justice’ argument unless that argument can be shown to have been the driving force and all other views were adequately factored in.

Here is a overview of how USA/Canada/ deal with this issue :

A reviewing court may set aside an administrative decision if it is unreasonable (under Canadian law, following the rejection of the “Patently Unreasonable” standard by the Supreme Court in Dunsmuir v. New Brunswick), Wednesbury unreasonable (under British law), or arbitrary and capricious (under U.S. Administrative Procedure Act and New York State law). Administrative law, as laid down by the Supreme Court of India, has also recognized two more grounds of judicial review which were recognized but not applied by English Courts viz. legitimate expectation and proportionality.

Mark this : The Supreme Court of India has two extra grounds – legitimate expectation and proprotionality.

Source : Internet

Lets look a bit more at the American Law here, as I think this is most apt for the 2G case. The US standard of scrutiny is called the “Arbitrary and Capricious Test”.  Check out the book Administrative Law by Jack Beerman for more on this. Again I beg you to stay with me – I know India is not the USA.

“Courts will set aside agency decisions found to be “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” 5 U.S.C. § 706(2)(A). As the Supreme Court has explained: “The scope of review under the ‘arbitrary and capricious’ standard is narrow and a court is not to substitute its judgment for that of the agency. Nevertheless, the agency must examine the relevant data and articulate a satisfactory explanation for its action including a ‘rational connection between the facts found and the choice made.’” Motor Vehicle Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). Agency action is arbitrary and capricious “if the agency has relied on factors which Congress has not intended it to consider, entirely failed to consider an important aspect of the problem, offered an explanation for its decision that runs counter to the evidence before the agency, or is so implausible that it could not be ascribed to a difference in view or the product of agency expertise.” Id. Reviewing courts “may not supply a reasoned basis for the agency’s action that the agency itself has not given.” Id. (quoting SEC v. Chenery Corp., 332 U.S. 194, 196 (1947)).” — Fox v FCC, Docket No 06-1760-ag, slip 18-19 (2nd Cir. June 4, 2007)


I imagine the entire Congress Party is getting ready to forward that they knowingly dropped revenue consideration in favour of increased spectrum user fees. Note that I am purposely sidelining the “level playing field” . This is a bogus argument which will be dropped somewhere along the way. As soon as they realize this will lead them into the legal trap of unjust enrichment of private individuals.  Besides it is highly debatable if it is indeed a level playing field if new entrants can gatecrash into a market that was proven by others without partaking in any of the risks.

So the entire defence is going to eventually rest on this :

You cant fault us for policy – there is no loss because the goal was teledensity and not revenue on licence.

Once they do this : The case is cleanly split into two – 1) the policy decision and  2) Raja’s manipulation. On the second case, the damage is limited because cancellation of all licenses can not be on the cards. On the first case, the government will  enter into a familiar standoff with the judiciary questioning its authority to entertain challenge to policy decision.

The hope is the court doesnt miss the irony here : On one hand, the UPA government is saying Rs 32 per day is the standard of wretchedness and on the other it says forgoing 50,000 Cr on capital account can be justified for teledensity and level playing field.


Arbitrary and Capricious policy Vs Wrong Policy

I noticed this article by Pratap Bhanu Mehta in todays paper. The way the questions are framed should bother us all. Consider this :

It puts Chidambaram on the spot only when you assume three things: that the policy was wrong, that being associated with the policy does put a question mark on your integrity, and that the decision was not the responsibility of the prime minister or cabinet as a whole.

Source : IE (emp mine)

There is no wrong policy. Because Wrong isnt a working word. The question should be – “Was it an arbitrary and capricious policy?”  This nuance is important.  What is right for PC/Raja/Unitech  may be wrong for Indians.  On the other hand,  a  policy can be fairly tested as Arbitrary and Capricious .  If you accept this nomenclature – the next question will be. Is there enough evidence to prove that the policy, of forgoing tens of thousands of crores in exchange for teledensity, can pass a ‘reasonable basis’ test ?

The stakes are this :

If the policy is found to be arbitrary and capricious – then the policy can be cancelled. The fruits of the policy will be voided and they can be redone to benefit the Rs 32/day wretched people who have the most to lose.

Can the government’s teledensity argument stand up to the test ?

What happens if an equivalent to the American standard of “Arbitrary and Capricious” is applied by the court. As mentioned in my previous blog post – we have the former Finance Secretary Dr Subbarao on record stating that teledensity was neither an objective not a factor at any point of time.

But I think that has to be an explicitly  objective and indepth study of costs and benefits of foregoing a certain amount of revenue against what would be the returns by way of increasing teledensity.  We had not done that at any point of time.  We were always arguing on the basis of level playing field rather then on the basis of any growth dimensions this might have subsidise that a..

Source : RC – TRAI says cant price spectrum


I leave you with a short comparison of 2001 vs 2008 – the governments defence should start from these points.



Subscribers : 40 Lakhs

Those who want spectrum : 12

Available  : 210 licenses based on free spectrum

Demand from operators : Zero


Subscribers : 24.9 Crores

Those who want spectrum : 575

Available : 157  (122 new + 35 crossover)

Demand from existing : Severe – 150 existing operators in queue

(Source : Rajeev Chandrashekar’s presentation)



Next ?

A point by point rebuttal of all arguments of the Delhi Super Lawyers club – all of whom stand to make windfall profits from any confusion they can introduce into the case. Amazing they get so much airtime to put forth their clients interests before a gullible country.


9 Responses

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  1. Rakesh Babu G R (@raksopenmind) said, on September 28, 2011 at 4:42 am

    But you don’t mention if having a “Arbitrary and Capricious” policy is an offense under Indian law

  2. realitycheck said, on September 28, 2011 at 5:00 am

    My view on two things :

    1) Cancelling licences and salvaging precious revenue = arbitrary policy test enough

    2) Criminal culpability of MPs = arbitrary policy + much more needed

    My view is cancellation will bring to fore completely new evidence of wrongdoing by those private operators who are sure to approach the court. So 1) can help 2)

    Makes sense ?

  3. Rakesh Babu G R (@raksopenmind) said, on September 28, 2011 at 10:28 am

    We have the “loan” paid to Cineyug which could be given as proof of inducements given in return for a favourable policy, but will the SC accept it since it is a “loan”? The thing is that the CBI can actually trace the bribe money but it doesn’t

  4. Samit Sharma (@Samit2309) said, on September 29, 2011 at 7:32 am

    Im no lawyer but my two cents…

    One arguement being made to justify FCFS policy is that to create a level playing field for newer and older entrants wrt one time entry fee.The contention is that older players DID NOT get the licence by way or auction and could go to court over it.

    This is an arguement which falls flat on its face because ‘fear of litigation(however realistic or justified it might be) cannot become basis of a policy decision which is supposed to benefit the public at large.Infact,circumstantially it casts aspersions on intent behind choosing policy and whether any new or old applicants offered any reward for pursuing FCFS given the costs of litigation and inherent financial losses that will be incurred.

    Circumstances suggest that policy makers at that time were not applying their minds to making a fair policy and their intent is questionable and that prima facie motive exists for certain players to approach policy makers to nudge policy in a certain direction.

  5. raj said, on September 29, 2011 at 2:55 pm

    do they sell petrol @ 2001 price? or do the MPs take 2003 salary and no more?

    If so spectrum price @2001 is ok

  6. Barbarian Indian said, on September 30, 2011 at 2:53 am

    “The” post for the times.

    The bedrock of “socialism” is arbitrary and capricious policies. Once this is removed, socialism can not last even a single day and will be forced to morph into a “welfare state”, which while not desirable is the best form of a republic one can get. All developed nations are “welfare” states.

    Socialism tries to differentiate itself from outright totalitarianism ala Stalin etc. but the wise can see through it in no time.

  7. Kailesh Rajdev said, on September 30, 2011 at 3:07 am

    Also Congress claim that TELCO were not doing well is a farce. Their Share prices were at peak, would not be if they were doing so bad. Watch the share price movements of Telcos, those applying for 2G license, winners of the license. As a matter of fact everything was fixed from the beginning and what followed was only an attempt to endorse their misdoings with GOI rubber-stamp.

  8. […] I not only hoped for all 122 licenses to be cancelled but also for the court to lay down its standard of scrutiny. That is exactly what has happened. The exercise undertaken by the officers of the DoT between […]

  9. […] in his article are nothing new and have been addressed by various people including myself in “Arbitrary and Capricious” and “2G Spectrum and TRAI ” . But this is the first time Shri Sibal is laying […]

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