Business Today

Shock therapy

Arvind P. Datar | Print Edition: March 4, 2012

In January 2008, nine companies were the lucky allottees of 122 telecom licences. Not all were in the business of telecommunications. Some were real estate concerns that had no experience whatsoever in this specialised and complex sector. The blatantly illegal and brazen manner in which these licences were issued led to the filing of a writ petition directly before the Supreme Court. The petitioners included several prominent and reputed civil servants, professors, a retired admiral and Dr Subramanian Swamy.

Arvind P. Datar
Arvind P. Datar
Four years later, the Supreme Court has cancelled all these licences in a severe indictment of the then Minister of Communications and Information Technology, A. Raja. It would be an understatement to say that the judgment makes shocking reading. The court observed that from September 2007 till March 2008, "the exercise undertaken by the officers of the DoT under the leadership of A. Raja was wholly arbitrary, capricious and contrary to public interest".

Brazen, Unilateral Action: Four non-permanent members of the Telecom Commission - the Finance Secretary, the Secretary, Industrial Policy, the Secretary, Information and Technology, and the Secretary, Planning Commission - were not even informed about a meeting where critical decisions were taken. No action was taken on the recommendations that specifically pointed out that the allocation of spectrum and the pricing methodology suffered from a number of deficiencies. The Department of Telecommunications (DoT) also did not get in touch with the Ministry of Finance. When the Law Minister suggested the whole matter be considered by an empowered group of ministers and the opinion of the Attorney General be taken, Raja called the suggestion "totally out of context". Meanwhile, the Prime Minister wrote to Raja on November 2, 2007, pointing out that numerous complaints had been received. The Supreme Court has recorded that Raja did not bother to consider the Prime Minister's suggestions.

Favouring a Few: Simultaneously, Raja advanced the cut-off date from October 1, 2007, to September 25, 2007. This was done, according to the Supreme Court, "only to benefit some of the real estate companies who did not have any experience in dealing with telecom services and who had made applications only on September 24, 2007 - one day before the cut-off date fixed by the Minister of Communications and Information Technology on his own".

The 'first-come first-served' policy was also changed by Raja at the last minute through a press release dated January 10, 2008. This enabled some of the applicants, who had access either to the minister or the officers of the DoT, to get bank drafts prepared towards performance guarantees of Rs 1,600 crore. Everything was stage managed to favour these applicants who reaped huge profits. Swan Telecom, which was incorporated only on July 13, 2006, had paid a licence fee of Rs 1,537 crore. Its promoters off-loaded 45 per cent of their equity in favour of Etisalat of the United Arab Emirates for Rs 3,544 crore. Unitech paid a licence fee of Rs 1,651 crore but its promoters sold 60 per cent equity for Rs 6,120 crore to Telenor of Norway. Similar sales were also made by Tata Teleservices.

Delhi High Court:
Unfortunately, for these licensees, STel was an applicant but was ousted from consideration because of the altered cut-off date. The company filed a writ petition before the Delhi High Court which was allowed and the ministry was directed to consider the offer of STel. The single judge observed that the ministry could not change the rules of the game after the game had begun. Instead of accepting its mistake, the ministry went on appeal to the division bench which, however, affirmed the view of the single judge. Thus, the cut-off date was held to be illegal. The ministry went on to the Supreme Court where the matter was settled out of court. However, the Supreme Court made it clear that the ruling of the high court about the cut-off date would stand and would not be interfered with. Fortunately, a PIL was filed in the Supreme Court which finally set aside the 122 licences that were granted.

The Aftermath:
The Supreme Court verdict is likely to have many legal and commercial consequences. Some of them are:

Contracts can be set aside: Unlike several developing countries, India has a strong judiciary. Serious irregularities in obtaining major contracts may result in cancellation of contracts by the high courts and the Supreme Court. A party which has been unfairly treated can now approach the courts to set aside contracts. PILs can also be filed to challenge such contracts. There is no need to file a long drawn suit.

Central Government must refund the licence fee:
The licences were cancelled as they were illegally issued. Under Section 65 of the Contract Act, if an agreement is discovered to be void, any person who has received an advantage must return it. In this case, the Central Government or the DoT cannot retain the licence fees and must refund them to the respective allottees. Thus, Swan Telecom and Unitech must be refunded the licence fees paid by them.

No relief for purchase of promoter shareholdings: In several cases, the promoters/shareholders of the successful licences have sold their shares to foreign companies at an enormous profit. These foreign companies can get no relief from the government and, if at all, can only proceed against the promoters from whom they bought shares.

Extra due diligence required: After this judgment, extra caution will be necessary before anyone bids for a licence or contract, or seeks to buy a controlling stake in a company that has been awarded a licence or contract. With rampant corruption at the Centre and the states, there is a likelihood of major contracts being questioned, particularly if the procedure followed is irregular or the rules are bent to favour a particular party. Large multinationals will now have to be careful before they purchase equity shares in companies that have obtained licences or contracts for major projects.

Certification of compliance required: There is a strong possibility of major contracts being questioned through PILs. This is bound to also delay the completion of major projects. To avoid uncertainty and unnecessary litigation, the concerned ministry should issue a certificate that the procedures prescribed were valid and the selection process was transparent and fair.

Public auction mandatory: The grant of licences or contracts to private parties to exploit scarce natural resources will now have to be done by public auction. This, it is hoped, will compensate the state adequately for the transfer of these resources to the private domain. The Raja style of changing the rules after the game has begun will not be allowed.

Investor confidence will not be shaken: The judgment will only strengthen the confidence of Indian and foreign companies in our judiciary. Licences or contracts that are granted in a suspect manner will be subject to judicial review and may even be cancelled. This is bound to ensure greater transparency in such transactions.

Conclusion: The landmark Supreme Court verdict has undoubtedly affected several telecom companies whose future is now uncertain. But the manner in which these licences were issued was so illegal that it is difficult to imagine any other conclusion. Many of the licensees may have themselves to blame. As Lord Greene put it pithily 80 years ago: "It scarcely lies in the mouths of those who play with fire to complain of burnt fingers."

The author is a senior advocate of the Madras High Court

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