WebSify
Follow us on
Mail
Print

Bhupesh Bhandari: Adding valuation fuel to spectrum fire

Source : BUSINESS_STANDARD
Last Updated: Wed, Nov 28, 2012 19:20 hrs
Telecom M&A, pricing talks to end in a week - secy

R P Singh, the former Comptroller and Auditor General (CAG) official, has kicked up a storm with his revelations (later modified) that Murli Manohar Joshi, chairman of the Public Accounts Committee of Parliament, had tried to influence the CAG's computation of loss from the government's sale of telecom spectrum in 2008.

Singh also suggested that the loss figure was significantly lower than the sit-up figure of Rs 1,64,259 crore in the final CAG report. He estimated the loss at Rs 2,645 crore by indexing the 2001 price of spectrum – of Rs 1,658 crore – to the annual inflation rate.

Singh, who said he was pressured to sign the final CAG report, has only added to the general confusion over the issue. In truth, there is no one way of evaluating the loss the government accrued from selling valuable spectrum to a clutch of companies in 2008. Most agreed that the then Union telecom minister Andimuthu Raja had ill-served the government by fixing prices at 2001 levels – that is, Rs 1,658 crore for all the 22 telecom circles in the country – though the sector had evolved significantly between then and 2008. But to what degree was uncertain.

The conventional way of revaluing an asset is to index it to interest offered by banks on fixed deposits. If you take State Bank of India's current rate of 8.5 per cent, the spectrum that was sold for Rs 1,658 crore in 2001 would have been worth Rs 2,935 crore in 2008. This means spectrum was undervalued 77 per cent.

Since the government earned Rs 12,386 crore from spectrum sale in 2008 – Rs 9,014 crore from new licences and Rs 3,372 crore from crossover licences (a special window opened for CDMA operators to acquire GSM spectrum) – the loss to the government using this method would come to Rs 9,537 crore.

The CAG report used other tools to calculate the loss. S Tel, a company owned by C Sivasankaran, had in November 2007 written to Prime Minister Manmohan Singh offering to pay the government Rs 6,000 crore over 10 years for a pan-India GSM licence (including the spectrum that came with it). It raised the offer to Rs 13,752 crore a month later.

If S Tel's offer were used as a yardstick, CAG said, the government could have got Rs 67,364 crore: Rs 38,950 crore from new licences, Rs 14,573 crore from crossover licences and Rs 13,841 crore from incumbents for spectrum allotted beyond their mandated 6.2 MHz. Since the government got just Rs 12,386 crore, this pegged the loss at Rs 54,978 crore.

In December 2010, Etisalat of the United Arab Emirates bought 45 per cent in Swan Telecom (it bought 13 circles for Rs 1,537 crore, and was later renamed Etisalat DB) for Rs 3,217 crore. This valued the company at Rs 7,149 crore (pre-investment valuation: Rs 3,932 crore). According to CAG, this yardstick took the loss to Rs 57,666 crore.

Between March 2009 and February 2010, Telenor of Norway bought 67.25 per cent in Unitech Wireless (which had got all 22 circles) in four tranches for Rs 6,135 crore. This valued the company at Rs 9,100 crore (pre-investment valuation: Rs 2,965 crore). If this were used as the benchmark, CAG said, the loss to the exchequer became Rs 69,626 crore.

The unsaid assumption was that at the time of these stake sales, the only asset these two companies had on their books was spectrum; hence, their valuation was really the valuation of the spectrum they owned.

DoCoMo of Japan had bought 27.31 per cent in Tata Teleservices for Rs 6,120 crore and 20.25 per cent in Tata Teleservices (Maharashtra) for Rs 949 crore. (Tata Teleservices too had got spectrum in 2008.) But CAG did not use these deals to quantify the loss, perhaps because these companies already had sizeable business before they got spectrum during Raja's tenure.

In 2010-11, the government had amassed Rs 1,05,000 crore from the sale of 3G spectrum through auction. Relying on the observation by the Telecom Regulatory Authority of India (Trai) that 2G spectrum was really 2.75G spectrum and, thus, not very different from 3G spectrum, CAG said this benchmark could have made the government richer by Rs 1,76,645 crore. This benchmark brought the loss to Rs 1,64,259 crore.

In September 2011, it transpired that there wasn't complete agreement in the CAG team over the methods used to calculate the loss. An internal letter written on May 31, 2010, by Singh, who was then director general of audit (posts and telegraph), said the draft CAG report did not quantify the "loss to the government due to the decision to not auction 2G spectrum".

Singh mentioned the loss based on the S Tel formula but did not include it in the draft report because the company had subsequently withdrawn the offer. The 3G benchmark could not be used, Singh said, because "charging [money] for 2G spectrum was never recommended by Trai, and the government has never contemplated any charge for spectrum other than the entry fee." An internal note circulated in Singh's department on July 8, 2010, said: "We are not on strong ground in the argument made." It added that, "however, since the headquarters" wants a draft, "we may forward it".

When the CAG report was tabled in Parliament to much controversy, incumbent telecom operators said nothing because it went against the newcomers who had started the price war that was bleeding the industry. Now that the government has started to auction 2G spectrum on the basis of the price discovered in the 3G auction in 2010-11, which formed the bedrock for the Rs 1,76,645-crore scam, the same players are crying themselves hoarse that the price is too steep and not in sync with business realities.

blog comments powered by Disqus
most popular on facebook
talking point on sify finance