Law minister Veerappa Moily should now be a happy man. On September 13 he blasted the country?s highest audit office, Comptroller and Auditor General of India (CAG), for failing to make timely interventions that could have otherwise prevented many scams and scandals. Moily was scathing in his criticism when he said, ?Scandals and scams are known even when they are being planned and executed. If audit draws attention to them forthwith in a well-published manner, such scandals can be halted mid-stride. Post-mortems are good but they can be conducted only when a patient is dead.?
Guess who came to the CAG?s rescue? Strange it may sound, telecom minister A Raja. The day Moily was ranting against CAG, Raja was happily confirming to journalists an earlier FE report that his ministry was working to give a bailout to the failed operators who were given licences by him in January 2008 through dubious means. As if acting on Moily?s counsel, the CAG lost no time and dashed off a letter to the department of telecommunications (DoT) secretary warning against any such proposals as it would be violative of the telecom policy. With CAG having done its job this time by making a timely intervention, it remains to be seen whether this time Moily and his colleagues would be able to stop Raja from doing what he did in 2008!
However, in trying to stop Raja from committing an even bigger scam than he committed in 2008, the CAG has also dashed the hopes of any new operator biding time to let the three-year lock-in that prevents them from selling-off pass so that they can honourably exit the business. Here the CAG has gone on the 2007 Trai recommendations, which barred the new licensees from any merger and acquisition until the completion of their rollout obligations. It?s another matter that Raja swears by this recommendation but happily tweaked this provision that enabled Unitech and Swan to sell part of their stakes to Telenor and Etisalat, respectively. While Raja prevented the promoters of the new telecom firms from selling their equity for a period of three years so that they do not make unearned gains, he happily allowed them to offer fresh equity, thus making a distinction between merger and acquisition.
However, the CAG?s letter to the DoT clearly warns against any move by the companies to sell off and merge with another firm after the three-year period is over without first meeting the rollout obligations and paying a revenue-share fee to the government. The warning is timely because in January 2011 the lock-in clause comes to an end. Two companies would be strongly hit if the government decides to abide by the CAG?s counsel?UAE-based Etisalat and the country?s second largest mobile operator Reliance Communications (RComm). Reports started surfacing since April, after the peace pact between the two Ambani brothers, that Etisalat was going to acquire a stake in RComm. That such reports were pure humbug was pointed out in these columns subsequently. Later in June, RComm?s board allowed the company to divest 26% stake in favour of strategic investors. Enthusiasts once again saw an RComm-Etisalat deal around the corner. However, the Etisalat chairman earlier this month accepted that any deal with RComm was not possible this year and that it was looking at other possibilities like buying a stake in Idea Cellular?which again is not possible.
The guidelines for M&A in the telecom space prohibits any company to have more than 10% stake in another telecom company within the same operating circle. However, a complete merger is allowed. Since Etisalat has 45% stake in Swan (now known as Etisalat DB), which has licences in 15 circles, it can?t buy more than 10% stake in either RComm or Idea. A merger is ruled out because of the lock-in on Swan. So, the best course of action for Etisalat would be to wait until January 2011 when the lock-in ends and then merge with RComm or Idea if one goes by the latest statement of its chairman. However, now the CAG has spoiled the fruits of any such wait because if by then Etisalat has not met its rollout obligations, it should not be allowed to merge even then.
There are ways to meet the rollout obligations but the CAG has done its homework well here also. A company like Etisalat has not made commercial launch of services in any of its circles when the licence conditions demand that 10% of district headquarters be covered by year one and 50% by year three. However, Etisalat claims to have launched services in all the 15 circles with a subscriber base of 18,000! Achieving such milestones is not difficult. Rollout obligations do not require you to have subscribers so companies put up skeletal network through intra-roaming pacts with incumbent operators and meet the rollout requirements. No wonder no company has been fined so far for not meeting the rollout norms.
However, to check such loopholes in the rules the CAG has said that mergers should be allowed to the new players only after having met the rollout obligations and paying revenue-share licence fee to the government. Now here?s the problem: companies like Etisalat may have met the rollout obligations as defined by some DoT rule but has not paid a single paisa to the government by way of revenue share licence fee.
So, with the CAG making a timely intervention and hoping that the government listens to it, the wait for January 2011 for Etisalat or RComm or any other new operator is not going to bear any fruit.
rishi.raj@expressindia.com