The department of telecommunications (DoT) is set to cancel 13 licences granted to Swan Telecom (now Etisalat DB) on the charge that the company was a front of ADAG’s Reliance Telecom and not eligible for licences under the crossholding norm. An internal note to this effect, drafted by the DoT, and reviewed by FE, is awaiting the approval of the telecom secretary and telecom minister Kapil Sibal. Once approved, Swan will be served showcause notices.
The move will also bolster the CBI’s case against the company. It will also strengthen its probe into the relationship between Essar and Loop Telecom.
This development reveals that the law ministry and the DoT are not on the same page with regard to the definition of associate companies. While the law ministry?s definition of associate companies absolves Swan from being a front company of Reliance Telecom, the DoT’s assesment is in sync with the CAG and the CBI, which have alleged that Swan was a front of Reliance Telecom and thus was not eligible for licences under the crossholding norm.
Under the crossholding norm of the unified access service licence (UASL) guidelines, a company already providing telecom services in a circle is prohibited from getting another licence if its equity in the latter company is more than 10%. At the time Swan applied for licences, Reliance Telecom was already operating services in the same circles.
DoT had almost readied the show cause notices for cancellation of Swan’s licences in August, but subsequent to the law ministry’s opinion on the definition of associate companies, decided to review the matter at its end. However, an internal note drafted on September 29 after considering the law ministry’s opinion has proposed cancellation of the licences on the grounds of ineligiblity.
While defining associate companies, the law ministry had said that for company B to be treated as an associate of company A for the purpose of clause 8 of the UASL (cross-holding norm), there must either be a holding or subsidiary relationship between the two companies or there must be more than 50% shareholding in both the companies by the common parent holding shares in either of the two companies. In the absence of these facts, one company might not be considered an associate of the other. Since ADAG claims that its stake in Swan was 9.9% at the time of applying for licences, by this definition Swan could not be considered its front company. Further, it had also said that while applying for licences, the cross-holding norm did not apply on the company. It is only after the grant of licence that the norm becomes applicable. Since ADAG claims that it had sold off its stake in Swan before it was granted the licences, charge got diluted.
The CAG, on its part, had maintained that ADAG’s stake in Swan was much higher than 9.9% because of the Rs 1,100-crore equity base of Swan, Rs 1,000 crore was contributed by ADAG through preference shares. The company disputes this interpretation on the ground that preference shares cannot be treated as equity.
The CBI also in its charge sheet stated that Swan was created out of funds from Reliance Telecom. The ADAG on its part has consistently denied such charges.