What is 2G? What is 2G scam? Burning topics for journalism Exam

The government has been jolted by controversy over licences and radio airwaves that a state auditor says were given out too cheaply, depriving the government of up to $39 billion in revenues.

The telecom minister, A Raja, was forced to resign and Prime Minister Manmohan Singh has been asked to explain himself to the Supreme Court. Opposition parties want a full parliamentary probe and have blocked proceedings until the government relents.

So, what is the controversy all about and what does it mean for the telecom sector and companies?

What is 2G spectrum?

2G is short for second generation wireless telephone technology. Three main benefits of 2G over their predecessors are:

a: phone conservations are digitally encrypted; b: 2G systems are far more efficient on the spectrum allowing for greater mobile phone penetration levels; c: 2G introduces data services for mobiles.

Where was the alleged scam?

In 2008, the country issued 122 new telecom licences and the second-generation radio spectrum bundled with it to several domestic companies that had little or no experience in the telecom sector, and at a price set in 2001.

The state auditor said that the allocation process did not reflect the correct value of radio spectrum as there was no auction and the entire process was flawed, benefiting selected companies. The auditor said that the telecoms ministry did not do the requisite due diligence, granting 85 out of the 122 licences to ineligible applicants.

The auditor also said the ministry did not follow its own guidelines, changed the cut-off date for applications, which gave "unfair advantage" to some companies over others. It said that the entire process "lacked transparency and was undertaken in an arbitrary, unfair and inequitable manner".

The auditor said that several companies deliberately suppressed facts, disclosed incomplete information, submitted fictitious documents and used fraudulent means to get licences and thereby access to spectrum.

Will companies lose licences?

The auditor said that units of Unitech Ltd, which received licences in 2008 and now operates services in a joint venture with Norway's Telenor, had not fulfilled eligibility conditions including required share capital.

Other firms which were ineligible according to the auditor include Loop Telecom, Videocon Telecommunications and S Tel Ltd. The auditor said that Swan Telecom, which has since been partly acquired by the UAE's Etisalat , was given licences even though a unit of No. 2 telecoms firm Reliance Communications held over 10% of equity, a violation of rules.

It is still to early to know whether any licences would be cancelled, but the pressure would be strong not to do so because operators have invested in networks and have subscribers. Any big crackdown could send a wrong signal to investors.

But the government could ask operators to compensate for the potential revenue loss as highlighted by the auditor and may impose fines for not meeting separate rollout obligations.

The auditor also named nine other operators, including market leaders Bharti Airtel , Reliance Comm and Vodafone , who were allotted spectrum beyond the contracted limit without paying any upfront charges, costing the government a potential $8 billion.

What does it mean for the telecom market?

If the government imposes heavy fines on new licensees singled out in the auditor's report, it would weaken them further. The newer operators are yet to make profit as they offer heavy discounts to grab subscribers, and any financial penalty would be a blow for them, forcing some to leave the market.

Some operators may also freeze network expansion until clarity emerges on the regulatory front, meaning slower growth for network equipment vendors and other service providers. In case licences are cancelled, it would lead to natural consolidation in the crowded 15-player market.

Will this affect FDI into India?

The country's mobile phone market is the world's fastest-growing and its nearly 700 million users trail only China, making it a must-invest market for any major global operator. But regulatory uncertainties have been a concern for some and could make foreign companies start to look more carefully where to invest.

Any penalty or adverse regulatory action could also weigh on companies such as Telenor and Etisalat, which were not part of their respective domestic ventures when the licences were distributed. Also, the controversy would make future investors more careful before they decide to invest in the market.

Vodafone, the single-biggest foreign investor of the nation, is fighting a $2.5 billion tax bill over its acquisition of a mobile firm in the country and has signalled frustration with the regulations.

Why did the CBI in 2009 raid the offices of the department of telecommunications (DoT)?

The DoT under Communications and IT Minister A Raja has long been facing accusations that the government issued telecom licences in 2008 to eight new operators at throwaway prices.

Later, two of these new licensees sold a chunk of their stake to foreign operators and made a neat profit, which accentuated the charges of enriching a select few at the cost of the exchequer.

Critics pointed out that had the licence or spectrum been auctioned to the players the government would have gained substantially and according to some estimates the gain would have been to the tune of Rs 60,000 crore. But these were issued to companies that had neither network, subscribers nor experience in the telecom business. After the CVC was dissatisfied with the DoT's explanation it finally turned the matter over to the CBI.

How did the new operators make a killing?

A pan India telecom licence (involving 22 circles) costs Rs 1,651 crore, therefore new licensees like Swan Telecom and Unitech Wireless paid this sum (Swan got licences for 13 circles so it paid Rs 1,537 crore) and later sold a part of their stake at an enterprise valuation of over $2 billion.

This is 700 per cent higher than what they invested. For instance, Swan let UAE-based Etisalat acquire 45 per cent in the company for around $900 million (approximately Rs 4,500 crore at Rs 50 to a USD) valuing the company at $2 billion.

Similarly, Unitech Wireless let Norway-based Telenor acquire a majority stake of 67.25 per cent in it for Rs 6,120 crore, valuing the company at Rs 9,100 crore. The mind-boggling valuations accrued not because of the licence but the bundled spectrum, a scarce national resource that came with it. The logic was simple: Get a licence, the spectrum would come bundled with it, the company's valuation would increase, divest a part stake and earn super normal profits.

What led the government to not auction the spectrum?

According to the telecom policy, when a licence is allotted to an operator some start-up spectrum is bundled along with it. The policy does not have a provision for auctioning the spectrum.

Then what mistake did Raja or DoT make in not auctioning the spectrum?

Raja is right when he says that he upheld Trai's recommendation of not auctioning the 2G spectrum. However, he's wrong and confuses people by mixing auctioning of licence and spectrum.

The Trai and the telecom policy both had said that market forces should determine the licence fee. Obviously if licences are auctioned, the market price for spectrum is achieved and there's scope for government to realise higher values.

Why was it awarded only to eight operators?

In May 2007 when Raja replaced Dayanidhi Maran as Minister, DoT asked for Trai's recommendation on whether or not to continue with the policy of having unlimited telecom players in a circle. Globally there are a maximum of five operators in each circle as it promotes efficient use of the scarce spectrum.

Though the government accepted the Trai's recommendation that there should be no cap on the number of operators, seeing the deluge of applications the DoT put a temporary bar by not accepting applications after October 1, 2007 and issued licences only to those firms that had applied till September 25, 2007.