Two landmark judgments in less than a fortnight have dealt body blows to the battered image of the UPA government. The first one went in favour of Vodafone which was saved from shelling out Rs. 11000 crore as capital gains tax on the purchase of Hutch’s India operations. And now the Supreme Court has in another landmark ruling cancelled 122 licences awarded by former telecom minister A Raja to his corporate cronies at throw-away prices. The common thread to both the judgments is that the government had acted in a “totally arbitrary and unconstitutional manner”. While being a blow for justice, it is at the same time a blow to the government’s credibility—or what is left of it.

With brazen shamelessness that has been the hallmark of this government, telecom minister Kapil Sibal has gone to town proclaiming that the judgment does not reflect poorly on the Government. True, the court has frowned on the ‘first-come-first-served (FCFS) principle followed by Raja in allotting licences, but that was a continuation of the NDA’s policy. So, argued Mr. Sibal, all that the UPA was guilty of was following in the NDA’s footsteps!   

These audacious assertions, however, cannot detract from the fact that Congress, the Prime Minister and the UPA regime once again stand thoroughly exposed. The policy followed by the telecom ministry under A Raja was a total perversion of FCFS principle followed by NDA government, both in the context and the content.

The critical difference between the NDA and Raja’s FCFS was that when the NDA gave out such licences, there was no great mismatch between demand and supply. There was no spectrum shortage at the time, or any flood of applications, or (most importantly) any bizarre twisting of the FCFS principle as was done by Raja. Therefore, FCFS in 2003 harmed no one. If anything, it lowered tariffs and helped expand the market.

In the current case, there were 575 applications when 122 licences were given out. Raja followed no policy other than favouring his cronies. Even the first-come-first-served principle was perversely changed to favour particular companies by fixing October 1, 2007 as the last date for receiving applications, and then abruptly advancing it to September 25 without giving any reasons. The revised cut-out date itself was not made public till January 10, 2008. In other words, while changing the cutoff date, Raja knew exactly whom he was benefiting. Even on that day, those qualifying were also given precisely 45 minutes to furnish bank drafts for Rs. 1,650 crore as upfront licence fees. Obviously, this was known only to those who were preordained to get the licenses.

In any case, during UPA-1, the government had come out with its own licensing policy and was under no compulsion to stick to FCFS. And pray, if everything was going fine, why had the Prime Minister and the Law Minister opposed Raja’s FCFS?

The Supreme Court’s ruling brings to closure the most important part of the mega scandal, but is by no means the end of the story. The coming months will be full of action, which will be keenly watched.

For the last several years, the telecom sector has been victim of uncertainty created by accusations, policy incoherence and legal battles related to licensing. Now the court has ordered that the process of cancellation of ‘tainted’ licences and issuing fresh ones through auction has to be completed in the next two months. This is an opportunity for the government to wipe the blots clean, as it were, and put in place a clear, fair, transparent and progressive policy.

Despite its scathing criticism of the conduct of telecom policy in 2007-08, the order could nonetheless result in a multi-billion-dollar bonanza for a cash-strapped government, as 540 MHz of spectrum could become available for allocation through a public auction mandated by the court.

It will be interesting to see how TRAI goes about the task. As of today, the supply of spectrum outstrips demand, more so if 4G spectrum is to be auctioned. At the same time, the demand for 2G spectrum will be muted, unlike the mad rush for 3G spectrum. The telecom business is going through a serious financial crunch and telcos do not have that kind of money to splurge. Also, not more than two-three of the eight new players are still serious about their business in India.

The rest, like Loop Telecom for instance, have already expressed intent to surrender licence. The auction price will be determined by the way TRAI formulates the rules. Will the entire spectrum being released be auctioned in one go, or only a part of it? What will be the base price? How many players would want to bid? Answers to these questions will determine how much revenue the government can rake in from spectrum auction.

The judgment has, however, created many losers and contains some problematic announcements. It is silent on whether the companies whose licences have been cancelled should be refunded the fee that they paid for it. TRAI will have a formal consultation on whether the licensees are to be compensated and, if so, to what extent. The fact that most of the licensees never rolled out their networks and so have to pay huge fines on this will also have to be taken into account.

There is also the question of those companies – such as the Norwegian state operator Telenor, Abu Dhabi’s Etisalat and Russia’s Sistema – which forked out huge premiums to pick up stakes in the companies that originally procured the tainted licenses. Now that even these have been declared illegal, they feel penalised for not having committed any sin themselves. Telenor has urged the government “to ensure that a foreign investor that had nothing to do with these processes is not harmed.” Sistema Shyam has also said that it reserved the right to protect its interests by using all available judicial remedies.

If these companies sue the government, which they might well do, the latter would find it difficult to disown its own Telecom Minister’s actions. No government can lightly shrug off liability resulting from minister-level decisions. On the other hand, if the government were to get away unharmed in court action, the damage would be to India’s reputation following heightened assessments of country risk.

Two aspects of the court's ruling could come under close examination in the coming days from constitutional experts. The court appears to have found the “first-come-first-served” policy fundamentally flawed and unconstitutional. It regards proceeds of auction as national enrichment. But why this insistence on transferring resources from the economy to the government? Why ignore a draw of lots among financially and technically qualified contenders or equal allotment to all qualified applicants?

The judges also said they had not ruled on licences issued between October 2003 and January 2008 under the first-come-first-served policy as the companies that had received the permits were not party to the court proceedings. But what if someone makes them parties to a follow-on case? The court’s logic could endanger licences of incumbent operators such as Bharti, Vodafone and RCOM, which otherwise could benefit from the exit of the newer operators.

In a broader perspective, the first-come-first-served was the basis of government policy in many sectors such as mining. So the implication of the judgment could be far-reaching. It would have been better if the court had only laid down principles to be followed in such allocation and left the method to the Government. Battered and tattered as it is, the government might take on the court on this issue.

Yet, it would be perverse to say that the Supreme Court order would dent investor confidence in India. By quashing the tainted licenses, the Supreme Court has come out against arbitrary rule-making and capricious exercise of power. If anything, it should be welcomed just as the Vodafone verdict: Both are ringing endorsements of the rule of law, which is what investors, foreign or domestic, ought to expect in any country that is not a banana republic.

The telecom sector has done well by the country in the past decade, pushing forward growth and connectivity. It continues to need sensible regulation and support from government policy. It needs to be strengthened through the reallocation of idle spectrum, and the consolidation of the industry that will inevitably follow. The government and the regulator must make the right decisions transparently on the basis of sound commercial principles, and bring this messy and unpleasant episode to a close. That is the least they can do.

The author is Executive Editor, Corporate India, and lives in Mumbai