In January 2008, the US telecoms regulator, Federal Communications Commission (FCC) auctioned spectrum and earned a whopping $19.6 billion (a little over Rs 90,000 crore). Around the same time, India’s Department of Telecommunications (DoT) was giving away spectrum at a throwaway price of Rs 1,650 crore to new entrants in the telecoms business on a first-com, first-served basis. Within nine months of acquiring a licence, at least one company — Swan Telecom — has announced that it is getting a value for spectrum that is three times more than what it paid to the government.
There were four other new entrants — Essar-promoted Loop Telecom, Datacom, Shyam Telelink and Unitech — and two existing operators, Tata Teleservices and Reliance, who were given all-India spectrum at this price. If the Union Communications Minister A. Raja had allowed auctioning of spectrum, the government could have been richer by a few billion dollars (about Rs 25,000 crore if one goes by the price that Swan got for its spectrum). Therefore, this is a clear loss to the government exchequer.
When contacted, Raja said, “In allotting 2G licence I have followed my predecessors. The licence conditions were formulated in 1994. Under these conditions all the existing telecom operators got spectrum free. I cannot change rules of the game in between.”
Spectrum is a band of frequencies that can be used to send voice, video and data signals. In the US, in January, the government auctioned spectrum for the 700 MHz band, which is used for broadband wireless operations. In India, spectrum was allocated in the 1800 MHz band, which is the lifeline for GSM, a popular standard for mobile telephony.
“We issued fresh shares to Etisalat and, post investment, Etisalat has 45% equity in Swan, while other promoters’ equity is reduced to 55%,” said Sahid Bilwas, managing director, Dynamix Balwas group, one of the first promoters of Swan. Other promoters included the Anil Dhirubhai Ambani Group (ADAG). However, in December ADAG sold its entire 9.87 per cent equity.
For its 45 per cent stake in Swan, Etisalat paid $900 million (Rs 4,100 crore) in cash. That takes the total value of the company to $2 billion (Rs 9,200 crore). So, the value of 55 per cent that the original promoters control works out to $1.1 billion (about Rs 5,000 crore). Since the company has nothing but a licence to operate in 13 high-potential --- category ‘A’ and ‘B’ --- circles, for which it paid Rs 1,539 crore, it means the value of that licence is $1.1 billion.
Etisalat was earlier in advanced negotiations with Datacom, promoted by Videocon and the Mahendra Nahata group. In May, Videocon chairman Venugopal Dhoot announced that Etisalat had approached it for a possible acquisition of the company. According to a senior Datacom official, the negotiations hinged around a price of $1.2 billion. Datacom has licences for operating services all over the country except Punjab. The talks failed as Nahata and Dhoot started fighting over issues related to corporate governance.
Unitech, another new entrant, is also talking to various foreign players for an investment. Senior officials in the company said that talks with Telecom Italia are at an advanced stage at similar valuations. Therefore, most of the licences are up for sale either in part or full. None of these licence holders has even finalised vendors for buying equipment. Only Shyam Telelink, with Sistema as its foreign partner, has launched services. But Shyam is offering services on the CDMA network and not the GSM network that is part of the current controversy over allocation of spectrum.
The valuation Swan has got, following the Etisalat deal, indicates the government sold spectrum at about a third or what the market may have priced it had it been auctioned.
Both, the finance ministry and the Prime Minister’s Office (PMO), had advised Raja to go for the auction route for allotting licences. Raja didn't accept their advice. This is a classic example of how, in a weak coalition, ministers from regional parties can become more powerful than PMO and the finance ministry. If the spectrum had been auctioned at that time, the government exchequer could have been richer by about Rs 25,000 crore. Now, a handful of promoters stand to pocket that money.
Communications minister Raja said: “I am not concerned about market value of spectrum. These are determined by market forces. In 1994 or later in 2001 the operators got spectrum – both start up and additional – at low price. See what is their value of today.” And he denied being asked to opt for auction. “PMO never asked me to go for auction of 2G spectrum. I recorded in the parliament that I would be the first person to accept the concept of auction of spectrum. However, 2G is not in my hands. During my tenure, spectrum policy for 3G is formed. We are auctioning spectrum for 3G services.”