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Connection errors

If any of the new licensees sell their licences, profits on the sale must be taxed at a special rate — a kind of windfall tax, writes Rajeev Chandrasekhar.

india Updated: Nov 18, 2009 01:34 IST

For a country that has pretensions to economic superpowerdom, and more specifically, that has an economic strategy that significantly depends on foreign investment flows, the inability or reluctance of the Department of Telecom/Telecom Regulatory Authority of India (DoT/TRAI) to handle a simple process of awarding telecom licences transparently should worry all of us.

The protagonists in this tragicomedy — DoT and TRAI — have by now developed a perfect track record of ‘doublespeak’. Phrases like consumer benefit, common man and competition when emanating from them take on an ominous hue. It’s not the first time that the TRAI and DoT (seemingly acting in concert — when the opposite should be true) have used the common man and his benefit to roll out scams.

Take the recent initiative by the TRAI. On October 16 it initiated public consultation to ‘facilitate easier consolidation and M&As (mergers and acquisitions) in the telecom sector’. In fact, the language in the consultation paper already points to a decision of allowing M&As across the board in telecom, and the questions are framed to extract responses that’ll facilitate a decision favouring M&As and, therefore, reduce the number of telecom operators.

This would seem harmless enough, except that this move by the TRAI is in sharp contrast to everything that the DoT has said over the last two years while defending itself against allocation of spectrum at 2001 prices in January 2008. The telecom minister is defending his decision by saying it will introduce competition and lower prices, an important public policy objective given widespread evidence of cartelisation among existing operators. In fact, in response to one of my questions, he wrote to me, “viewing the present teledensity of 25 per cent, there are ample opportunities available to new telecom licensees”. In multiple press releases, the DoT has justified the decision using a TRAI guideline as a prop.

The DoT-TRAI tandem has worked before as well. For instance, in the infamous Wireless in Local Loop (WLL) scam that morphed into the current first-come, first-serve telecom policy of 2004, the international long-distance grey market fiasco and the recent spectrum giveaways. Given the losses that the exchequer has suffered, it’s surprising that there was no investigation into the conduct of the DoT and TRAI.

It seems the combination continues to work even now. This is how I predict things will play out if we leave them to DoT-TRAI.

A set of companies gets spectrum and telecom licences at Rs 1,600 crore apiece. The market value for this spectrum is much more — Rs 4,000-9,000 crore — depending on the market transactions of Unitech, Swan, and Datacom and the reserve price for 3G licences).

The DoT requires a lock-in period before the licences can be sold and holds these companies to their network rollout obligations. But the TRAI has come out with a consultation paper to do away with the restriction on sale of licences to allow ‘consolidation and M&As’.

That leaves all the new licensees in an interesting situation — they have licences worth far more than what they paid for and there’s no need to roll out or invest further. They can sell their licences to make a lot of money for doing nothing. Where does that leave the government and people for whom these new licences represented affordability and competition? Basically nowhere. The government loses money from spectrum and the people see the market going back to the same structure as before.

That’s the scenario if the TRAI continues down the path it has signaled in its October paper. However, if it is serious about remaining consistent with the objectives of increased competition and consumer benefit this is what it should be doing.

Make sure that no part of its recommendations impacts adversely the basic principle of consumer benefit. The regulator’s role is not to maximise investor returns. The TRAI must intervene in cases of cartelisation and not rely on forbearance as an excuse to abrogate its role in tariff reduction.

It must ensure that consolidation, if permitted, still leave 9-10 operators in each market. Given the size of the Indian market--800 million-1 billion by 2015--each of the 10 operators will have scale of almost 100 million, making them among the largest players in the world.

If any of the new licensees sell their licences, profits on the sale must be taxed at a special rate — a kind of windfall tax. Since these licences were obtained cheaply and without auctions for spectrum in the name of consumer interest, if the operator exits without rolling out a network it is only appropriate that the profits accruing should be to the account of the government as well.

Rajeev Chandrasekhar is a Member of Parliament, Rajya Sabha

The views expressed by the author are personal.