Reliance Jio Infocomm, a subsidiary of Reliance Industries, acquired Infotel Broadband Services Pvt Ltd (IBSPL) in June 2010, soon after the little-known firm won nationwide BWA spectrum for about Rs 12,750 crore.
The CAG, in a draft report sent to DoT for comments, criticised the eligibility criteria set for bidders. The BWA spectrum sale, which took place when A Raja was telecom minister, did not provide a lock-in period for winners.
Reliance Jio Infocomm refuted all charges. It said in response to an e-mail query that the TRAI had emphasised that DoT should devise the scheme by which large and small ISP operators are permitted to deploy BWA networks.
"Due to the provision of inadequate eligibility criterion for the participation in the auction of BWA spectrum and deficient due diligence on the part of DoT officials, the promoters of IBSPL... made windfall gain of Rs 4,800 crore at the cost of public exchequer immediately after closure of BWA spectrum auction in June 2010," the CAG's draft report said.
The CAG said that while the DoT had barred promoters holding 10 per cent in a telecom company from selling their stake for three years after spectrum allocation, no such curbs were prescribed for the BWA auction.
"A non-participant company exploited the loophole left by the DoT officials in the eligibility criterion for obtaining BWA spectrum by acquiring a winning company without participating in the auction within hours of closure of auction process, thereby vitiating the sanctity of the auction process," it said.
Reliance Jio Infocomm said the lock-in period was with respect to licence and not for 3G and BWA spectrum.
The CAG report said IBSPL changed from a private limited company to a public limited company, IBSL, on June 17, within a week of winning the spectrum, and on the same day decided to allot 94.96 per cent shares to Reliance, which led to windfall gains for the promoters of Infotel.
Reliance Jio Infocomm, however, said there was no gain for Infotel's shareholders because it subscribed to fresh equity issued by the company. Also, the spectrum was procured at an auction-determined price, not an administered price.
"There was no question of any windfall gain," Reliance Jio Infocomm said.
CAG said DoT neither investigated nor questioned IBSPL's source of funds even though bank guarantees furnished by the company were disproportionate to its turnover.
IBSPL had submitted an earnest money deposit of Rs 253 crore in the form of bank guarantees to bid for the spectrum.
The DoT did not seek sources of funding for the earnest money of Rs 253 crore, which was 1,500 times the company's annual turnover and 100 times its paid-up capital when the application was submitted, nor did it analyse the financial condition of the applicants, the CAG said.
Reliance Jio Infocomm said this "is not seen in right spirit." The notice inviting applications required submission of a bank guarantee of the prescribed amount and not a cash deposit.
The CAG added that IBSPL increased its authorised share capital from Rs 3 crore to Rs 6,000 crore a few hours before the BWA auction closed.
The auditor said the DoT asked IBSL in September 2010 for information, including the shareholding pattern before and after the change in the company's name, and the information was provided by November 2012, after more than two years.
Even then, IBSL did not reveal that the shareholding had undergone major changes after the auction, it said.
According to Reliance Jio Infocomm, "This statement is not correct. Shareholding details of IBSPL were submitted to DoT on June 22, 2010, itself, prior to applying for change of name from IBSPL to IBSL in September 2010."
RJio said the request for change of name was followed by three written reminders. Additional documents required by DoT, including processing fees of Rs 500, had also been submitted.
The company again changed its name to Reliance Jio Infocomm Pvt Ltd in March 2013.
Reliance Jio Infocomm holds a unified licence that allows it to provide all telecom services, including mobile services.