Normally, businesses routinely go bankrupt — driven mainly by wrong financial decisions or a host of uncontrolled factors such as environmental, macroeconomic, etc. And there is a well-defined process in place (under a legal framework) to deal with it. Hence, common sense tells us that for VI as well we should let this process play out, so as to prevent getting into dealing with a situation of “moral hazard”, thereby ending up setting a wrong precedent — motivating other companies from behaving responsibly. So what is so special about VI? Should it deserve to get special treatment? If yes, why? Let’s find out.
The answers to these questions are embedded in our past actions, for that, we have to dive into history and introspect about the cause that led us to this situation. The other metric to weigh is if no such bailout is granted what are the pitfalls and whether we will end up damaging the foundation of our digital economy irreparably? The details of the impact are listed in my earlier note — “The Collateral Damage of VI going out of business”.
To curtail the length, I have tried my best to keep the discussion as short as possible. For digging into details one can refer to my note titled — “The History of Indian Telecom Licensing — A Policy Perspective”
NonSerious Players
The foundation of this mess was laid out long back in 1995 — when we (DoT) decided to auction basic service licenses without forcing the participating players to pay upfront. This allowed non-serious players to set high prices for licenses (One of the bidders HFCL bid Rs 80 K Cr )— forcing serious players to commit to these numbers and which they fail to pay — leading to the migration package dated 22nd July 1999, which the operators had to accept unconditionally.
Battle of AGR
The discussion on AGR is important as 34% of the VI’s debt on GOI (approx Rs 2 Lakh Cr) has emerged out of total mismanagement of this issue. The crux of this battle was the definition of “revenue” which became the reference for payment of license fees. The outcome of this licensing framework was due to the settlement that the operators had with the government (22nd July 1999). Under this structure, the DoT wanted all the revenues (telecom & non-telecom) to be aggregated together for the purpose of calculating license fees (a certain % of this base), but the operators wanted the license fee to be applicable only to the telecom portion. The matter got litigated since then and ended in an adverse judgment against the operators by the SC on 24th Oct 2019. Now, what led to this decision, and who was responsible is up for debate (Interested readers dive into details here — Indian Telecom’s AGR Tangle — Who is at fault?).
But the key questions here of interest are —
a) What actions were taken by the telecom companies to mitigate the risk of an adverse judgment, given the fact that the issue remained in litigation for more than 20 years? Unfortunately none. Possible actions — 1) Push for an earlier settlement, knowing that interest and penalties were getting accumulated; 2) Seeking for dismantling the revenue share regime when it was already clear (after the 2G scam) that all future spectrum was to be allocated based on auctions; 3) Restructuring their business to prevent accumulating non-telecom revenues — case in point is that Vodafone had taken licenses under multiple companies and these gave loans to each other — and accumulated interest from these loans became a substantial part of their revenue for the purpose of calculating license fees, and many more.
b) What action the DoT took to prevent such a nasty outcome? Again, very little. Possible actions — 1) Support and accept TRAI’s recommendations — who did its best by recommending a fair proposal. All suggestions and recommendations were ignored by the DoT (please read my earlier note — “Was SC’s Interpretation of AGR the Real Intent of DoT?”; 2) Restructure the revenue share regime by forcing the operators into the negotiating table. As they have done it now (under the new telecom reforms — bifurcated telecom and non-telecom revenues under two separate buckets), and what prevented them from taking such action earlier?
Unrealistic Auction Prices
Diving into the details of spectrum auctions is important as 66% of the VI’s GOI debt (Rs 2 Lakh Cr) emanated from these auctions. One might ask what could we have done better to prevent an outcome such as this when all companies decided to bid in an open and transparent auction. My answer is a lot. A properly designed auction and recalibration of auction prices emanating out of enthusiastic bidding could have helped mitigate the risks of such an outcome. But, given the situation then, it is easier said than done. As both DoT and the Regulator (TRAI) got entangled in some serious past mistakes committed by them earlier, thereby preventing them (even if they wanted to) from taking corrective actions. Let’s discuss the constrain of the TRAI and the DOT one by one.
General Auction Design
Asking companies to pay all dues upfront is a very important design factor for all auctions. Why? It prevents nonserious players from entering and screwing the lives of all other serious players in the business. Also, it prevents the GOI from carrying the risk of dealing with future bankruptcies. As stated earlier, the deferred payment option of 1995 auctions drove the AGR issue. Similarly, the same factor was responsible for excessive bidding in most spectrum auctions since 2012 — a key contributor to the VI’s mess today. But looks like, at least for the spectrum auction (since 2012), both the DOT and the TRAI were virtually forced into it — largely due to circumstantial reasons —the SC judgment, and CAG Report (more on this later). Please note that the 2010 3G auction had a different design flaw which played a disastrous role in all future auctions— which also we will discuss subsequently.
Had the “upfront payment” clause got built into all spectrum auctions, then VI and others would have no choice but to bid consciously — a) preventing spectrum from selling; b) and therefore forcing DOT to cut prices; c) exposing VI’s business problems much in advance for enabling all of us to take corrective steps, and preventing the disease from metastasizing into the current state.
The shrinkage of the telecom space from 14 players (2010) to 2.5 players today is a testimony of the fact that cost of doing telecom business became unaffordable for others who exited the space early, and VI is just a recent entry into that list. And most of it can be attributed to unrealistic auction prices.
2010 3G Auction Design
Now let's discuss the design issue of the 2010 3G auction which laid the foundation for all future auctions. Fortunately, in this auction, the DoT was prudent enough to demand upfront payment of all auction dues. But it didn’t help mitigate the auction prices. Why? The following are the reasons — a) 2010 3G auctions were held in the backdrop of the 2G scam when multiple companies were given 2G licenses (bundled with spectrum) at a subsidized rate based on FCFS policy; b) Given the subsidy, the bank's willingness to lend money liberally; c) the new companies had a strong urge to perpetuate business and without access to 3G spectrum they didn’t have any chance. All these reasons motivated them to bid irrationally as if there were no tomorrow.
The intensity of their bids can only be understood — a) by comparing the total number of days the 3G auction lasted (2 months vs just 7 days of the last 2022 auctions); b) by converting all the spectrum auction prices into dollar terms and comparing them with each other. This data is listed in the table below.
Note in dollar terms the outflow of the 2010 auction is the 3rd highest -almost at par with 2015, and 87% of 2022.
This means the prices which emanated out of the 2010 auctions were totally unrealistic, and should not have been used as a reference for calculating reserve prices for future auctions. No?
But the TRAI in 2012, instead of correcting these unrealistic prices, did the following — a) used the 2010 auction prices for calculating reserve prices for the next auction; b) set up a wrong precedence for deferring payment of a large proportion of auction dues for future. The decision was almost analogous to taking a painkiller and pushing the pain to a future day that we are experiencing now. But why did the TRAI act as it did? Answer — The CAG report on loss to the exchequer on account of the 2G Scam — the follow-up public outcry driven by it, and the SC judgment of 2nd Feb 2012.
The CAG Report
The CAG in its report dated 8th Oct 2010 estimated a loss of Rs 1.76 Lakh Cr due to the subsidized 2G license granted by the then telecom minister (Shri A Raja) in 2008/09. The CAG used the 3G auction prices of 2010 as the reference for the purpose of estimating this loss. Now doing so was wrong and highly speculative due to the following reasons—
a) The price emanating out of any auction is a result of a “demand & supply” gap. This means if the supply of 3G spectrum was more (than what was offered then) the price it would have fetched would have been a fraction of what the GoI was able to realize. Then how could have CAG applied the 3G auction prices to estimate the 2G spectrum loss?
b) 2G spectrum that was assigned was restricted to only 2G services (and prevented from being used for 3G) and the spectrum was highly fragmented. Then how could CAG use 3G auction prices to value the 2G spectrum which was offered bundled with the license? It is like using heavily discounted prices of cut pieces to value full-length continuous fabric.
CAG report drove the public perception aganist DOT that it is distributing natural resources at a fraction of its value, and is one of the key reasons which prevented DoT and the TRAI from correcting spectrum prices of future auctions.
The SC Judgment
This judgment was triggered by the 2G scam and was delivered on 2nd Feb 2012. The key point in the judgment is on page 93 and reproduced for ready reference.
“Keeping in view the decision taken by the Central Government in 2011, TRAI shall make a fresh recommendation for grant and allocation of spectrum in the 2G band in 22 Service Areas by auction, as was done for allocation of spectrum in 3G band”
Note that the SC did not state anything about the reserve price to be used for the next round of spectrum to be auctioned. Also, the judgment is totally silent about what design condition to be used, such as payment terms, etc. Hence, we can conclude that SC was only driving the objective of distributing spectrum based on open and transparent auctions and not by the FCFS (First Come and First Serve) policy — which has huge design flaws — leading to the 2G scam.
The FCFS Policy
TRAI’s recommendation of 2007 (which freed up spectrum from those reserved for incumbents), followed by DoT’s public announcement of giving licenses to new players, dismantled the existing FCFS policy and made it totally dysfunctional. But why? Wasn’t FCFS a time-tested policy and DoT had been using it to give licenses since 2001, first to the Basic Service Operators (at rates recommended by TRAI), and then to Cellular Operators from 2003 (at rates discovered in the 2001 auctions)? The key reason for FCFS breaking down was due to the fact that it worked only when one player applied at a time, and NOT when multiple players applied simultaneously. Why?
FCFS had no built-in mechanism to break the stalemate (who to grant license and who not to) which happens when many players apply at the same time. Even if there were any, (like date of application, etc) it was never formally notified. Actually, the DoT was confused. This is clearly evident from the letter dated 26th Oct 2007 sent out by it to the law ministry for seeking its approval on the best of the legally tenable alternative to deal with the floodgates of applications triggered by TRAI’s recommendation and its earlier announcement. The law ministry on 31st Oct 2007 returned the reference without giving any conclusive opinion. The problem actually got aggravated by the fact that access to just the UAS License did not guarantee the assignment of spectrum. Spectrum was given based on a separate queue, thereby making FCFS not just a single-stage process, but a three-stage process till the assignment of the spectrum (See WPC’s FCFS order dated 23rd March 2001).
Stage 1 was the issue of LOI (Letter of Intent), Stage 2 was the issue of the license subject to meeting LOI conditions (which included payment), and Stage 3 was the assignment of the spectrum (WOL — Wireless Operating License). This means anyone applying for a license may be ahead in the queue in the earlier stages but might get pushed back in the queue in the spectrum assignment stage. In other words, whosoever fulfills the condition of the LOI first, gets to apply for the spectrum first, and therefore his probability of getting the spectrum is higher. Now you know why there was a fistfight at the payment counter in DoT when the window was opened (in 2007). And why Raja meticulously controlled the opening and closing of the window only for a short duration of time. Because each operator wanted to pay first to be first in the queue for spectrum assignment.
It is natural to question why in the year 2007 the TRAI could not visualize this when it recommended that 800, 900, & 1800 MHz bands should not be auctioned but only be assigned administratively. And even if it did, then why did it not spell out what rules need to be followed (for assignment) when multiple operators apply simultaneously? And Why Raja did not see through this lacuna and continued with the faulty FCFS policy and didn’t choose to rectify it?
2G Spectrum Scam
The foundation of the 2G Scam emanates from the battle between GSM and CDMA operators. Since the 2G spectrum was bundled with the license, the GSM operators were able to convince the regulators to give CDMA operators half the amount of spectrum compared to them to ensure level playing conditions. The logic was that CDMA is an efficient technology and therefore needed half the amount of spectrum to serve an equivalent number of subscribers. The other important issue was that the spectrum efficiency measurement metric had higher weightage on voice than on data — putting CDMA at a significant disadvantage compared to their GSM counterparts as they could not unlock their data capabilities. These regulatory facts along with a much thinner ecosystem of CDMA made it unattractive for the operators, thereby motivating the players to queue up for the GSM spectrum.
And as soon as more players queued up for the GSM license — the existing FCFS policy collapsed (as explained above) — leading to the 2G Scam.
Summary
a) the Faulty auction design of 1999 resulted in the settlement of 22nd July 1999; b) this laid the foundation of the AGR issue; c) in parallel, the battle of CDMA vs GSM opened the floodgate for the demand for GSM license in 2007/08; d) leading to the collapse of the existing FCFS policy; e) and resulting in the 2G scam, the CAG report, aroused public sentiments of causing harm to the exchequer, and the follow-up SC judgment; f) all these together prevent the DOT and the TRAI from correcting spectrum prices and improving designs of future auctions, g) resulting in VI accumulating a GOI debt of more than 2 Lakh Cr.
Given the above explanation, what do you make of this situation? Should the VI case be treated as a normal case of bankruptcy or deserves to be dealt with differently? The readers are free to make their own judgments.
But the implications of not doing so are already listed in my earlier note titled — The Collateral Damage of VI going out of business.
Finally
In the future, the spectrum prices will have to get corrected (with or without VI). Why? Let’s say if a bail-out is granted then it has to take into account the restructuring of VI’s Rs 2 Lakh Cr debt of which 65% of on account of spectrum outflow. This will be tantamount to repricing the earlier held auctions. Now consider the case if the bailout is not granted, then the spectrum goes back to GOI’s kitty. Which means it will get re-auctioned at some point in time in the future. The key spectrum bands of interest held by VI are 900, 1800, 2100, 2500, 3500, & 26 GHz.
900, & 2100 MHz will be of no interest to JIO, and given Bharti’s public position of not buying spectrum in low spectrum bands and lots of spectrum in 2100 MHz, these bands will have no takers at these prices.
2.5 GHz will be of no interest to both Bharti and RJIO.
1800 MHz is the only band that might be of interest, but why will anyone spectrum more in 4G when the world is moving towards 5G?
3500 MHz band, RJIO has hit the cap of 130 MHz in 7 circles, and Bharti has close to the cap, and therefore there will be very little interest in both of them to take any further.
26 GHz band, the operators already have a large amount of spectrum and will have no interest in taking more.
Bottomline — In both situations (bailout or no bailout) GOI will end up making a loss. So choosing to let VI continue to operate (and doing whatever is necessary) seems to be a better option than the former. This will also be in the interest of all stakeholders, especially the consumers. As it will enable the optimal utilization of resources (especially spectrum), and preserve the competitive dynamics of the market — absolutely essential for ensuring the health of the telecom sector — a sector that affects all other sectors horizontally.
Of course, there will be some legal issues and challenges — emanating from allegations of disturbing the level playing conditions. But I am sure these will look trivial when compared with the magnitude of the problem at hand. It is clear from the above discussion that we all have contributed to and are responsible for this mess, and therefore now it is our collective responsibility to drive course correction, both in the interest of the country and all its stakeholders.
(Views expressed are my own and do not reflect that of my employer)
PS: Find the list of other relevant articles in the embedded link.
