2G: Catharsis & Commercial Implications

This week Supreme Court Justices G S Singhvi and A K Ganguly delivered a judgment that invalidated 122 telecom licenses and 2G spectrum acquired by 9 companies in 2008. The judgment has had a cathartic effect on a nation gripped by the corruption drama that's been playing in our courts for the last 2 years.  The judgment is landmark in that it questions the constitutional validity, fairness & public interest of an economic policy, castigates a regulator, accuses a cabinet minister of favouring some businesses and stage managing policy implementation and lauds the vigilance of enlightened citizens i.e. the petitioners, for fighting for clean governance.

But it is also landmark in the policy & commercial implications it will have. To discuss those implications CNBC TV18's Menaka Doshi is joined by Anil Divan, Senior Advocate - Supreme Court and Member of the Centre For Public Interest Litigation, Rajat Kathuria, Professor Economics at IMI and former consultant with TRAI and the World Bank, Bill Cook, head of the telecoms practice at DLA Piper and Co=chair of its India practice. In Mumbai with me, Pratibha Jain, former Goldman Sachs India counsel and now head of the Delhi practice of Nishith Desai Associates and Sanjeev Aga, former chief of Idea cellular, a company that will lose 9 licenses and spectrum as a consequence of this order.

Below is the full interview.

Doshi: I would like to start this discussion by talking about the key principles laid down by this judgment and their commercial implications and the most important is the stand that this judgment takes on the allocation process of natural resources by saying that first come first served is fundamentally flawed and that the State is duty-bound to adopt auction. So I am going to take you through some of the portions of the judgment that indicate this- the judgment says 'there is a fundamental flaw in the principle of first come first served, that it could have dangerous implications- 'we have no doubt that if the method of auction had been adopted, it could be the only rational transparent method for distribution of national wealth. Any other methodology for disposal of public property is likely to be misused by unscrupulous people. 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.'

Does this judgment make it binding upon the government, here onwards, to use only the auction process when it comes to the allocation of natural resources?

Divan: On the facts and circumstances of the case - yes, but there can always be exceptions. Take the case of water; water is running in a small river and there are tribals around- it's a natural resource. You can have an exception and you need not sell it by auction.

Doshi: Is that how you read the judgment? The judgment makes a space or allows for exception because to me, in several places, the judgment keeps saying that the best way to allocate natural resource, the only way to allocate natural resources is an auction and the viability of that can be very damaging using the water example that Anil Divan came up with?

Kathuria: Yes, I think it primarily applies to the spectrum in telecom and if you extend this to other sectors, then you might need to temper down that decision a bit. But coming back to telecom, I think even in telecommunication, spectrum allocation or assignment- it need not be an auction for e.g. if the first come first serve criteria in India had been handled properly with transparency and there had been no violation or irregularities in the allocation to favor a few people- I think none of this would have come up. We know that assignment by auction is transparent and given the current political economy in India, I don't think the Supreme Court had any other option but to say that allocation by auction is the best criteria given the circumstances. I think it has to be conditional and what is happening in India today saying that auction is the best way to allocate any natural resource may not be accurate because there could be a benevolent person in a certain role that could assign public resources in public interest, in the interest of social welfare. So auction, given the situation, has turned out the best method of allocation but extending this logic to other sectors like oil and maybe other natural resources like land - maybe but to extend it to water or something which is so terribly important to life maybe extending the argument is a bit too much.

Doshi: How do you read it because to me if I was to re-quote from the judgment- '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.' It doesn't say natural resources like spectrum, it doesn't say only scarce resources and it says natural resources. How binding is this going to be and I want to talk about the kind of door it opens up for all those people and all those processes where auctions have not been used for now to be litigated?

Jain: I think one size fits all policy is not going to work and doesn't necessarily work in any other jurisdiction but I think the judgment does allude, in places, to the scarce natural resources and in that sense you can limit it though I take points of my learned colleagues that it can go either ways and I think its very important to have a full debate on it and make sure that this doesn't get read into being one size fits all and we see doors open in terms of other sectors seeing similar public interest litigation where it might not be, as Mr. Divan or Mr. Kathuria said, that there is a benevolent reason why it's a first come first serve basis whereas you have to distinguish why here they said it's a natural scarce resources which should have been auctioned and the price, the loss to the exchequer is significant.

Doshi: I am not sure this judgment makes that distinction very clearly to me. Mr. Aga I am going to come to you here. There are several implications of this. Let's focus on the telecom business with you at least. In this case, spectrum license is given out post 2008. They have said they didn't deal with anything before that because those cases were not presented in front of them. Does this open the door for someone to litigate every single handing out of spectrum or license on a first come first serve basis for the last 10-15 years?

Aga: First, let me take more than half a minute. One is that when the government has made such a mess of policymaking in the last few years, you are therefore getting the Supreme Court having to step in and honestly Supreme Court is not competent on policy matters. So when that happens you are bound to have- when the executive is failing to do what it is supposed to do- you are bound to have some kind of, what I meant to say, I wouldn't use the word overreach, but it shows lack of full perspective on policymaking. So I do agree with you that the statement, right by itself, seems to be binding on all natural resources. But obviously that's not the smartest thing to do because there are many situations where any auction is not possible. In the particular case, I would agree that first come first serve was not sound and in this particular case, auction might have been better. But to therefore say that auction in every case, in every natural resource is going to put a huge straightjacket to a lot of policy options which may not be the best for the country. Now your second question was... (Interrupted)

Doshi: I said open the door to litigate against all license handing out.

Aga: Yes, because it's still two things. One is that there is a judgment which pertains only to a certain set of licenses in a certain circular which is 10th January. Now the Supreme Court is not in a position to pick and choose say that A is in, B is out, C is in, D is out. So there is a bit of an atom bomb with a lot of collateral damage to companies which may have been benign or may have been...(Interrupted)

Doshi: For instance your company, I am sure you will point out, made applications before 2004-2006.

Aga: My ex-company because the applications were made in 2006 and the Supreme Court itself observes that their application should have been dealt within a month and there was no other company. So whether you have first come first serve or auction, it just lands, you should have got the license. So it cannot be that you are a victim or it should not be but unfortunately there is such a mess and the Supreme Court cannot go around saying Idea is in- this is a good idea, that's a bad idea. So we are seeing the consequences of bad policy management for a number of years. Also, what about some equal infirmities which happened before 10th January 2008? So the policy has to be very... (Interrupted)

Doshi: Do you think that's now open to challenge?

Aga: Whether or not it's open to challenge, a good policy cannot discriminate. You cannot have arbitrariness. It would be very arbitrary from a policy perspective. From a judgment perspective, it maybe all right. So I think what will happen is that now the government and the TRAI have to step in and one has to necessarily take this as a broad direction and as a wakeup call, but I think they will have to ask for some leeway to interpret it fairly and equitably.

Doshi: Mr. Divan do you think that this opens the door for anybody to litigate against license allocation that took place before 2008 if it took place on a non-auction basis and why just in telecom, anybody could raise the issue of any natural resource allocation that took place over the last decade or so and question if it was done on a non-auction basis, whether it was done within public interest or not? Are we opening ourselves up to what - another decade of litigation on this matter?

Divan: First thing is, every judgment is not to be read rigidly like a statute - that's the first principle of law. It has to be read in the context. In the context, first come- first serve was clearly not a wrong policy decision. It was a decision to favor the companies. So it's not mismanagement in the sense of a wrong policy choice. It is mismanagement in the form of trying to favor somebody.

Doshi: But that is not the distinction that this judgment makes. This judgment doesn't say that first come, first serve is fine except that you abused or vitiated the policy. This judgment says first come, first serve is not fine. That you are duty bound as a State to use the auction process.

Divan: First come, first serve basis in the context of the facts of the case or the National Telecom Policy, on the cabinet decision in 2003 - all those factors have been put in, the recommendations, etc and then you say that first come, first serve is flawed.

Doshi: Let me come to the issues at hand with regards to the commercial implications on the unwinding that we now face over the course of the next 4 months. The first clarification I would like you to weigh on Mr. Aga is the issue of license refunds. Do you think that those companies who are now seeing their licenses being cancelled will in fact get refunds?

Aga: I read the judgment carefully and I am not a lawyer but I think the judgment found a Circular of 10th January or something as illegal and it implied that the allocation of the giving of the license itself was illegal. Now if that is so, then the government had no business because it's a contract and the government had no business to collect the money and now obviously the money has to be refundable unless the company in question decides to participate in the new auction.

Doshi: In which case you think it might off set against whatever the costs in the new auction will be or will they have to be pay in that auction over and above whatever license fee they pay?

Aga: That would be wrong because you have a contract which has not been maintained by one side and therefore it just cannot keep on to that money. So the money needs to be refunded.

Kathuria: If there are refunds in license fee, this would not be a first time in India. There have been refunds- actually earlier in a different circumstance. So there is a history of refunds being made to consumers as a result of license fee reductions that were passed on to service providers in 1999 when we transferred from the 1994 telecom policy to the 1999 telecom policy. But that was a refund to consumers and it was implemented at the behest of the High Court and TRAI actually worked out the modalities by which the amounts would be transferred back to consumers. Taking that analogy and noting what Mr. Aga has said, it could be possible to do the same thing and TRAI could actually work out the modalities of a refund if in case there has been abuse of the contract from one party that is the government or the policy maker.

Doshi: So in this case, do you think there will be refund or not?

Kathuria: It seems unlikely that there would be a refund.

Aga: Let me ask Mr. Divan because he is the lawyer but I think your question is wrong. What the Supreme Court's judgment says is you never got a license, you never had a license and therefore...(interrupted)

Doshi: But you never got a license because the government policy was bad; not because you did something wrong entirely.

Aga: Question of refund arises because you never had...(interrupted)

Doshi: But the money was paid.

Aga: Yes; but it was never debited to license account. I am just being very legalistic and technical.

Jain: The actual judgment finally says that the granting of the license was illegal and is quashed. So if you take that and they are cancelled, then there is a legal case for a refund.

Doshi: Mr. Divan where do you stand on that? Do you believe that those companies whose licenses have been cancelled will get refunds?

Divan: I am not aware of the license conditions, but unless there is something to the contrary- if a license is set aside, the normal rule would be that refund should be credited to the party who has given the deposit because the contract is not going through. But this is subject to the various clauses of the contract. There is some show cause notice saying that you have not done your obligations at all. You have to roll out the system and you have not done- now that I am not aware of because that will be the matter of details. But broadly, there should be a good case for refund. I would like to point out two things. At the end, costs have been imposed of Rs 5 crore on three companies and I think Rs 50 lakh or something on the others.

Doshi: Correct.

Divan: Why? So this raises a question as to what the government wants to do now because they have to come back within four months and tell them that we propose to do this. We propose to give a credit. We don't want to give this and then the question will be further discussed at that time.

Jain: You have penalized the licensees by saying three of them pay Rs 5 crore, the rest pay Rs 50 lakh.

Doshi: Some of them, two or three of the rest have not been penalized at all, including Idea.

Jain: Have not been penalized at all. But the ones that have been penalized, there has been no culpability put on them in the judgment except for that they transferred the license ultimately for a much higher premium which under laws of our country is not a wrongdoing and the judgment doesn't say that except for use, to prove the fact that the licenses...(Interrupted)

Doshi: Explanation as to why the penalty has been imposed.

Jain: So if there is no culpability in the judgment as a whole, then the due process also would require that you give a refund.

Doshi: I also want to look at this from the point of view of those foreign companies that have invested in the three Indian companies that are now facing the loss of license and spectrum. Bill Cook, if you can come in here and talk about what you think will be the legal recourse available to those foreign investors and how you see them reacting? Of course, the immediate reactions coming in from their communication teams have been very negative, but how do you see them reacting legally to the situation that they are faced with?

Cook: I wouldn't characterize it as negative. I think that companies are stunned to a great extent, because this is rather unprecedented and one of the things that I think that the decision definitely conveys is a great sense of anger by the Supreme Court about how this process was discharged but as we all know in anger, sometimes comes, a lack of clarity and specificity that parties like foreign companies can depend on. So the danger here is throwing, as we say in America, the baby out with the bath water and taking an over encompassing approach to redressing. What happened here, which may well be the need, to take the licenses and rebid them. But if you are going to do that, then implicit in that process is, as we have said earlier notions of due process and fundamental fairness particularly for parties against whom there are no allegations of impropriety which would include the foreign companies that are involved here.

Doshi: How do you see the foreign companies react? Do you see that they have grounds to maybe take action against the Indian government because after all it's the policy that was bad or even against the Indian promoters because they came in after the licenses had been acquired?

Cook: Taking action and prevailing are two different as the lawyers on your panel can confirm. It seems to me that it's inevitable because the amount of money involved here that in the event that there are refunds and there is no way for the promoters to quit their obligations to the foreign companies investing in them. Litigations are inevitable but litigation against the Indian government - that might be a bit more difficult to see- where the foreign companies would have standing to act against the Indian government. They probably are standing; in fact they most assuredly have been standing to act against their partners, the promoters and developers of these companies because that's who they did the deal with unless they are originally involved as applicants, which my understanding is, impossible because they are foreign companies.

Jain: There is recourse available to the foreign investors to sue the Republic of India because we have bilateral investment treaties with about 82 countries including Mauritius, Netherlands and lot of jurisdictions where the investment would have come through and in these treaties, we do have built-in a whole concept around expropriation and in this case where your investments has literally gone to zero - that entire expropriation- so they definitely have a case if they want to pursue against the Republic of India which includes not just the government but its the Republic taken as a whole including all....(Interrupted)

Doshi: So they have a case against the Republic and they have a case against the promoters of the Indian companies that they have, in a sense, got together with the business... (Interrupted)

Jain: It again goes back to the culpability because, I mean, they have a case but the promoters if they come back, if there is no judgment in the corruption cases against them unless as a judgment against them and there is nothing in this judgment on culpability the promoters are just going to come back and say they were held illegal, the contracts- its not our fault.

Doshi: You don't agree with that?

Cook: I don't agree that the case against the government will easily be made and I think unfortunately, here, this is not an expropriation, not in a technical sense because it's not an action by the government; it's an action by the court and the government's position-  well, we cannot control the courts, we have separation of power, we are no different than the Supreme Court in United States. So unless there were some evidence of collusion between the  government and the Supreme Court that the court were acting as an instrumentality of the government, I think that it might be more difficult than your speaker is allowing, to make an allegation of expropriation. The fact that there was corruption here- that's a different story and to the extent that the foreign investor, under those bilateral investment treaties, has some cause of action against the government for its corruptive activity - that might be true.

Divan: I agree with William that there is no question of expropriation here. The government acted in a particular way which has been set aside by the court as being unconstitutional, arbitrary, contrary to Article 14 but as far as the Indian promoters or the Indian partners are concerned, they might have a cause of action depending upon what the terms and conditions of their contract are. So, I think, there is a good chance of litigation if the money is not given back by those who have received it.

Doshi: In the context of this, we have opened the door now to people questioning license allocations up to starting 2001. We have opened the door to people questioning all kinds of natural resource allocations; we now probably are faced with the situation where you have foreign investors in these telecom companies questioning their agreements with their Indian partners. Who is going to participate in whatever auction that takes place in four months from now for 2G spectrums and an age when we are looking at 3G and 4G and what does that mean for competition in this space- viability of both existing players and new players, what does it  mean for the consumer. How do you see all of that panning out?

Aga: I will try and give long answer. 2001 onwards, the applications were few and far between for e.g. and this is not just Idea but many other companies when they applied, they were the only ones. So whether it had been first come first serve or auction, it would have had the same outcome. The problem would come with some of the spectrum allocations which we have done under single licenses by end 2007. So I don't see the problem going back in the case of telecom from 2001 to 2007. In fact, as I told you, even among the 2008 licenses, there are cases which should have been given off in 2004 and 2006.

Your other question is where do we go from here and I would like to see this way but you are putting a doubt in my mind. I would like to see the Supreme Court more like a wakeup call and a jolt but Supreme Court cannot take on the job of laying out policies which are big fat documents.

Doshi: But they haven't done that- they have left it up to TRAI after all the castigation of the TRAI- they have left it up to the TRAI and the government to do that over the next four months.

Aga: Now what I would like to see happen which I think will solve the problem but I don't think it will happen and let me explain that- they have given it back to TRAI and the government who have caused the problem in the first place.

Doshi: But what else can they do, the Supreme Court cannot write the policy?

Aga: I will tell you what can be done. Not the Supreme Court but what the Prime Minister could do. I think we should take this mess and this problem to solve a long-term issue. I believe there is no such thing as an activist telecom ministry in any advance telecom jurisdiction in the world and India also is not supposed to have it. It has developed bit-by-bit, minister by minister- so the first thing we should do is a long-term vision of shrinking the role of the telecom minister to more sovereign and security matters. Second, the regulator should become what it is supposed to do. Regulation comes from regulator; they are not the telecom advisory body, they are the telecom regulators; regulation means laying down rules....      

Doshi: I understand these are all longer term reforms. Four months- how do you deal with the 2G situation?

Aga: What I think the Prime Minister should do is, even as you are enacting a new TRAI Act and changing the role of the ministry- appoint three or four additional members to the telecom commission as we did in the case of Satyam. So they were, through this system, along with the existing telecom commission and the existing TRAI on a six month basis..... (Interrupted)

Doshi: Who will participate in 2G spectrum in an era of 3G and 4G? 2G that you were suppose to get in 2007-08. You don't have money; you don't have a business model anymore because those licenses and spectrum has been taken away.

Aga: That's what I am saying; you require credibility which will be hard from the same set of people. So you require understanding that things have changed, times have changed, and there is a new leaf. If that is not so, I agree with you, it is going to be a big problem but why would you bid if this is going to happen again?

Kathuria: Clearly at the center of this is going to be how TRAI handles the directive of the Supreme Court over the next four months and how the extra spectrum is collected and pooled - how that is going to be auctioned and what price that auction fetches? Remember, there are nine ways to skin a cat. Auctions can be designed in many ways to generate high revenues, to generate high prices or to generate moderate prices. If you have a large amount of spectrum, you would get probably not as high price if you create scarcity as Mr. Aga was saying. You will probably get very high prices depending on the re-entry features of the auction design; you could generate different kinds of prices. So I think depending on how TRAI is going to handle this issue over the next four months, the future of the telecom sector will be determined.

Doshi: In which case, to the both of you here in the Mumbai studio with me, the last comments. The short term pain whatever it means for Indian promoters, foreign investors is all worth it if we are able to clean up the system, right?

Jain: I think the judgment has significant implications. I think we haven't had the time to talk about the short term implications. You have got subscribers, you have got service providers, suppliers - there are contracts that will need to be looked at and figure out what happens to those people who had absolutely no wrongdoing on their part to get involved in this mess and it is not a small issue.

Doshi: The example you were bringing up is the Kiranawala who has a contract to sell the services of a telecom company that has now lost all of its licenses or at least 90% of that.

Jain: Absolutely. If I prepaid as a subscriber for six months, four months hence my service provider doesn't have a license.

Doshi: May not exist.

Jain: High possibility based on the economics. So I think the intention definitely of the judgment is good but the remedy, especially for the unintended consequence, is a bit of a question mark especially as a lawyer.

Doshi: That's what the lawyer says Mr. Aga that the intention is good but maybe the implications of this judgment are going to be very disruptive. That could be just a short term phenomenon. Maybe this is finally the cleaning up of the telecom sector and with that the cleaning up of the allocation of all natural resources in the country. Would you believe that?

Aga: I hope so. In the next, as Rajat was saying, the next four or six months would be decisive. Let me say something - we are both corporate executives; in my case ex-executive, we are citizens. I am sick. We run upright lives and we run upright companies. I am absolutely sick of getting show cause notices and penalties. It has become a feature. Now, of course, our licenses have been cancelled. But as a citizen, as you started the program by saying, if this is a catharsis and one looks at it as an expression of anguish, as an expression that corruption will not work and people are going to stand up - then this pain would have been worth it.

Doshi: I would like to close by saying this that this judgment will have several short term negative disruptive commercial impacts as pointed out by our panelists on the telecom sector- maybe all natural resource sectors, bank loans and the likes. But maybe, this is the bitter pill that we need to swallow to slowly make a return to better health and better governance in the long term. It's a warning to how business does business in India.

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