Reality Check India

Supreme Court’s groundbreaking judgment on 2G

Posted in Uncategorized by realitycheck on February 3, 2012

Jan 10, 2008

On this day, the Congress led UPA government demonstrated to the world how business is done in India.  If business in India is a dance of  cronyism, the  Arangetram was of the allotment of precious 2G airwaves.  Prices were fixed in blatant disregard for the exchequer and modalities were arbitrarily created throwing norms of equality to the winds.  The simplicity and brazenness was remarkable. None of this happened on the sly – senior bureaucrats resigned, others wrote letters,  the finance secretary protested,  some media columnists screamed, all to no effect. The only two people who could rein in the determined Telecom minister kept quiet.  Over the next few months the country watched helplessly. The signal to the foreign investor was clear, put your dancing shoes on – you need to do the three-step :  a) arbitrariness and a certain masala flavour in policy environment b) gotta partner with middlemen who know to work with the arbitrariness (wink) c) rely on personal assurances more than due diligence and risk assessment.

We have been saying this for a long time. These three things must be smashed to pieces for true economic freedom to bloom.

Feb 2, 2012

The Supreme Court of India cancelled all 122 licenses awarded by the Congress led UPA government in 2008.  The political economy that sets the three-step dance has been dealt a body blow.  Lets take a look at the ramifications of this judgment.

When the news of the judgment was announced I was elated. 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 September,2007 and March 2008, under the leadership of the then Minister of C&IT was wholly arbitrary, capricious   and   contrary   to   public   interest   apart   from   being violative of the doctrine of equality.

Judgment link

Policy must pass test

The illusion created by the media over the past two years is that policy is above scrutiny. We were told that the only way the nation can recover from a policy decision is by actually voting the government out. Once that happened we would hope the next government would remediate. So while we are challenged to sleuth around and find the hidden bribe money, we were told not to question the holders of the license because that is due to a policy  decision.  In fairness they do raise a valid question : Is the government of the day not allowed to make a wrong policy decision ? If the right decision could always be known at the time of its making, why even have any discretionary powers with the government ?

Here is the thing : There is a difference between a wrong policy decision and an arbitrary and capricious policy decision.

The way you tell the two apart is if the govt agency can provide evidence that its decision was taken after considering all aspects before it and whether due process was followed in allowing contrary evidence to be presented.

In the 2G case, the govt’s challenge was simply to show that the decision was a wrong one, an erroneous one,  even a monumental blunder, but one that was made considering all viewpoints and information available at the time of taking that decision.  If the government could show that all 122 licenses would have been saved. All the country would then get is a “oops sorry”.

Why did the government fail so miserably ?  The attorney general made no effort to defend the policy in court, mostly pointing to the ongoing JPC and PAC committee probes.  What evidence did they need to show  ?  This is the very heart of the matter. The judgment points to dozens of misdeeds of the ministers involved – but I think the following is the biggest.

They could not show that any authoritative study was done that would link the abrupt introduction of new players with cheap spectrum to increase in tele density and lower tariffs.

The present governor of RBI, Mr Subbarao has mentioned point blank to the PAC that no such noble goal (of rural tele density) was ever the driving factor, rather the agency kept making the level playing field argument between older and newer players.  A lot of that seems to be oral and driven by whim and caprice. Not by deliberation and consideration of all relevant factors.

We all know this but let me show a factor that was never considered. It sounds seductive that you can give a 15,000 Cr chunk of air for 1,600 Cr to new players and they will pass on the savings in the form of cheap calls to rural and underprivileged folks.  In reality what happens is your winners will use the headroom ( 15,000 – 1,600 Cr) to conduct private auctions with foreign players and realize their market value for themselves. In fact, as responsible corporates they owe it to their shareholders to do that.  Water finds its own level. All the businessmen claim that they told the government that they are going to do exactly this. So it appears that this factor wasnt even considered against the lofty social goals.

I call the arbitrary and capricious test a baby test. “Just show us some evidence you considered all factors and you win“.  The government could not even put it past this one. A stricter test called the substantial evidence test exists and even seems to be applied in the Jamshed Hormusji Wadia vs Bombay Port Trust case which I found cited in the 2G judgment.

What about auction / FCFS

A lot of media folks jumped on to this observation :

In   other words, while transferring or alienating the natural resources, the State is duty bound   to   adopt   the   method   of   auction   by   giving   wide   publicity   so   that   all eligible persons can participate in the process.

Questions flew left and right. Can we give IIT seats on auction basis ? Can we auction water (a scarce natural resource) ? I say relax. The court is saying auction is the best way to prevent this kind of  a nasty outcome.

If  you, the state, prefers another method such as

  • first come first served
  • beauty contest (eg, an exam)
  • lottery

just be prepared to pass a judicial test of arbitrariness. In other words, make sure your papers are in order.

What about foreign partners

Tough luck for them, especially Telenor who seems to have been convinced that the only way to enter India is by this route. In the larger interest, they should name and shame the persons who gave them the confidence to invest such huge amounts in the middle of a raging controversy.  It should be remembered that so far they are not party to any investigation, but if they get aggressive they might be dragged into it.

The whole thing is not pretty.  India comes off as a country with a adhoc hotch-potch regulatory environment. One day they show us a magic rope trick – the next day they lay an advanced western concept of judicial scrutiny on us.

In conclusion

The UPA government is squarely responsible for this mess, yet it goes about its merry way as if nothing happened. In an ideal situation, a surge of free agent backlash would obliterate the party that did this crime to our economy and national prestige.  But in that scenario, the scam itself would have never happened because the politicians would actually fear the ballot more than the court.

5 Responses

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  1. Anon said, on February 12, 2012 at 5:40 am

    If that State is duty bond to have an auction, than how can it do anything otherwise? I don’t understand the leap from that form of word to your idea that they just have to show that the decision not to hold an auction was not arbitrary. The two statements are not consistent. Isn’t your idea what you think the SC should have said, rather than what it actually did say?

    • realitycheck said, on February 12, 2012 at 9:37 am

      I dont read it as an order that auction should be the only option available. That all other options will be dismissed as arbitrary without even giving the agency a chance to explain it. The judgment doesnt say “legally bound”

      • Anon said, on February 12, 2012 at 9:39 am

        IF the supreme court of India say someone is duty bond to do something and yet does not mean that they are legally bound to do it, then I think they should learn to draft better judgements.

  2. pilidlao said, on February 12, 2012 at 5:42 am

    A few points in addition to what I mentioned on twitter:

    1. There are two tests under which constitutionality is judged under article 14. The old one is the reasonable classification where the court asks whether the differential treatment of different classes is intelligible. This does not arise here at all because the challenge here is on the ground that 2008 claimants & 2001 winners were treated similarly, not differently (as it should have been). The newer test is arbitrariness that you talk about but even here, as I said, the TRAI report which the Court indicates it has gone through, clearly gives reasons for the course it recommended. More on that below but for legal purposes, that reasoning ought to have been justification enough to pass judicial scrutiny. The court is pretty dismissive of that (in only a couple of sentences) without giving reasons why which says more about the quality of its reasoning and the considerations it factored into it than about the merits of the issue.

    2. The objective here was to keep prices low not only by fostering competition but by also maintaining the threat of enlarging the circle of players so as to increase competition. The former could only be accomplished if the newer entrants were able to compete with the existing players on a level footing, otherwise the attempt would fail either with the new entrant folding up or being taken over by established, older (probably) players. The claim was that the initial subscriber acquisition cost for any new player starting from ground zero and getting up to speed would be higher than for an established player which is why auction is not the way forward. The intent therefore was to confer an advantage upon them so as to level the playing field. In a sense, the rationale was that private profit would be an incidental consequence of a policy whose primary goal is to advance the public good. The question that comes up is whether that advantage in turn translated into superior market performance for those companies & therefore a benefit to the consumer seeking cheaper services. That is the yardstick by which the policy ought to be judged (how it was actually implemented is a separate question), i.e., did the newer players perform up to expectation & are they able to compete on equal/worse/better footing with the rest? I don’t know the answer to that but TRAI has some company wise performance data for anyone interested. Also, TRAI, as I mentioned on twitter, has regulations regarding subscriber acquisition/retention and the charges/fines for not meeting/not meeting the set targets and the possible loss of allotted spectrum if conditions are not met. Given that the new companies effectively got a subsidy at the start, it is worth asking whether these goals/fines ought to have been differently set.

    3. When a subsidy of this sort is given, it becomes imperative to regulate the marketplace further to ensure that the benefit is directed towards the desired social end. Shourie made a comparison with IIT seats but there is a key difference – the subsidized IIT seat is not transferable! Question is whether similar restrictions on sale ought to have existed in the telecom sector. What some commentators have said – I do not know if this is true – is that what was done was not the owners of these new license holdeer simply selling their stake and making off with the profit but raising capital by issuing new shares and creating genuine partnerships with companies who have the experience, technology and wherewithal to actually contribute to the business. One might be able to argue that perhaps, the criteria for issuing licenses ought to have been greater as the petitioners argued and only companies with the necessary know how, experience and assets being allotted licenses. The government did issue some clarification about this but I don’t believe it was in sufficient detail to be able to judge what the actual case is and whether/to what extent a loss was actually suffered.

  3. realitycheck said, on February 12, 2012 at 9:34 am

    I think TRAI is as much a party to this as DOT. Lets put the two together and call them the agency.

    1. What you have stated are all relevant factors, but the agency should have shown that *ALL* relevant factors were considered and not just those which support their eventual decision. So it had to produce the whole record for scrutiny. As we know there are several pieces of information available at that time that the agency does not seem to have considered at all.

    2. Even though the court has to defer to TRAI expertise, they still have to explain their actions. Did they evaluate alternatives, consider information that opposed their eventual decision ? TRAI has never given an explanation in many cases where a rational person can never arrive at the same conclusion as they did. An an example; they ignored the changed market conditions and the evolved business models in this space.

    3. I believe offloading shares and dilution of stake is a technicality to get approval under FIPB. Does it matter if they sold promoter equity or issued new shares valuing the shares the hold at 10x the amount ? Stake sale means instant liquidity, fresh shares means they have to take the extra step of pledging their shares. Easy to pierce the corporate veil here – Etisalat and Telenor paid premium to assume controlling stake in the diluted company.

    4. The judgment points to various procedural issues such as failure to refer to Telecom Commission, changing the cut off date, first come first serve policy instead of auction when clearly the evidence pointed to great buyer interest – all willing to conform to the same terms. I think the court is just being nice to DOT+TRAI in rejecting their allocation on procedural basis even though they could have directly said they failed to give a rational explanation.

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