My Two Cents on 2G Scam - An Elaborate Post

Here's a more elaborate & clear post, unlike my previous post, on my understanding of how the licenses and spectrum had been awarded, and my opinions on the different aspects of the 2G scam.

History :
Before 1999, the telecom license was granted on a fixed amount. On 1999, they introduced a system where the telecom operators who would be granted license had to pay a one time "entry fee" which could be fixed by the Department of Telecom, and then share a percentage of their "Adjusted Gross Revenue" as their license fees & spectrum fees every year.

The details of this revenue sharing with effect from April 1 2004 (I could not find the details of the percentages followed before this, nor do I think it would be necessary for my arguments) is given below :
With effect from 1st April 2004, the license fee, excluding spectrum charges for cellular mobile telephone services is 10% of "Adjusted Gross Revenue" (AGR) for Metro Service Areas and category `A' circles, 8% of AGR for category `B' Circles and 6% of AGR for category `C' Circles.

The old cellular licensees (1st and 2nd CMTS licensees - the operators who got licenses between 1994-1998, who were paying a fixed amount every year as license & spectrum fees as against a percentage of revenue shares) in telecom circles have been given additional concession for a period of 4 years w.e.f. 1st April 2004 in the license fee. The license fee, excluding spectrum charges for old cellular licensees (1st and 2nd CMTS licensees) in telecom circles is 8% of "Adjusted Gross Revenue" (AGR) for category `A' circles, 6% of AGR for category `B' Circles and 5% of AGR for category `C' Circles for a period of 4 years w.e.f. 1st April 2004.

In addition to license fees, the CMTS licensees pay spectrum charges on revenue share basis of 2% of AGR for spectrum up to 4.4 MHz. For spectrum beyond 4.2 MHz up to 6.2 MHz, they are required to pay additional charges @1% of AGR. For spectrum beyond 6.2 MHz, which shall be given if the subscriber base is more than 5 Lacs, they are required to pay additional 1% of AGR. Allocation of spectrum beyond 6.2 MHz is subject to availability; however, spectrum allocation would be limited to a maximum of 10MHz + 10MHz per operator in a service area. Such additional allocation could be considered only after a suitable subscriber base, as may be prescribed, is reached.

This is the model which had been followed by A Raja while handing out the licenses during 2007-08 period.

The Scam :
The major misdoings by the Department of Telecom as far as I am aware, are :

1. The entry fee for the telecom operators who were given license & spectrum was fixed at Rs 1651 crores in 2001. The same entry fee was charged in 2007-08 too. The Comptroller & Auditor General's (CAG's) report says that this has resulted in the loss of 176000 crore rupees to the exchequer, the figure quoted worked out by looking at the prices at which the 3G spectrum was auctioned at.
2. The DoT (Department of Telecom) had announced onSeptember 24, 2007 that new licenses & spectrum would be distributed, and those who wanted to apply for the same were supposed to do it on or before Ocotober 1 2007. But then, the cutoff date was abruptly advanced to September 25 2007 - less than 24 hours after it was announced that new sets of licenses & spectrum would be granted. All applications which arrived after September 25 were summarily rejected.
3. Even among the vastly reduced number of applications on account of point(2), the First Come First Served policy was not followed. A few companies were favoured immensely.
4. Licenses granted to a lot of dud/dummy companies - companies which did not conform to the minimum requirements to be met by a licensee. In fact, it is being said that almost 85 out of the 122 licenses granted during this period were given to dud companies.
5. The DoT went ahead with its decision to grant license and allot spectrum without consulting the Cabinet.

My Take On This:
So far, the only point which is being highlighted by the media, and which is on everybody's lips is point(1). But I feel it is the other four points which are graver than the first point.
First of all, I do not understand the concept of having a fixed "entry fee" and then going ahead and charging a percentage of the gross revenue of the operators every year as the license & spectrum fees. Well, some might argue that such "entry fees" are required lest the operator fails to amass huge revenues every year - which will definitely not be because of lack of effort from the operators, as they would definitely try and make profits. They are businessmen after all!! - In such a case, don't you think that this entry fee must be minimal?

Auctioning has almost always favoured the wealthy. The auctioning of this entry fee would have favoured the existing operators, or ones who have a flourishing business in other areas from which capital can be diverted here. Any new player's chances would have drastically reduced. The side effects could be lesser competition, lessening the growth of the telecom industry, milder price-wars and so on which would have directly affected the common citizens. There is no need to mention that the auctioning process would have raised the entry fee to be paid by the operators, and any increase in initial costs/investment would result in increased tariffs. So, when a model is in place which would give higher revenue to the Government when the operators' gross revenue is high, is it prudent for the Government to act like a greedy, profit making organization tossing away the concept of "level playing field for all"? Many say that the Government has given away precious national resource for throwaway prices, but isn't there a model already in place which ensures that the Government is going to reap revenue forever from this scarce natural resource?

Another argument, (raised in the comments here), is that the license & spectrum purchased at Rs 1651 crore entry fee by some companies were in turn sold for around 4 times the amount paid. Technically speaking, a stake in the license holding companies was bought and not the license itself. And the companies who did this were companies who shouldn't have got the licenses in the first place - the dud companies I mentioned in point(4) - whose primary
purpose to get this license was to flaunt it to interested foreign telecom operators and make money by inducing them to buy a stake in their company, thus allowing them entry into Indian market. One cannot actually say that the entire money paid was the actual market rate of the "entry fee". It may also be that some other companies were also competing to buy a stake in that company, which would have definitely driven the price of acquisition up.

I still say that, compared to the other bungles of the DoT, the "loss to the exchequer" is not as grave as it is made out to be. It is the other issues like favouritism & flouting the norms while giving out licenses that needs to be focussed on, punished and eliminated from the system first.