Law Firm Senior Partners speak on the SC decision to cancel 122 licenses

Last Thursday the Supreme Court gave its verdict on one of the biggest corruption scandals in the country in which the then telecom minister A. Raja was jailed. The Supreme Court has cancelled all the 122 licenses issued on or post January 2008..According to the judgment, telecom regulator TRAI will make fresh recommendations on the grant of licenses. The Government will consider the recommendations of TRAI and take appropriate decision within one month. Out of the 122 licenses, 21 belongs to Videocon, Uninor holds 22, Idea 9, Tata Teleservices 3, Swan Telecom 13 and Loop 21..Bar & Bench spoke to Anuradha Dutt, Manoj Kumar, Mohit Saraf and Akil Hirani on the Supreme Court judgment..Anuradha Dutt, Partner Dutt Menon Dunmorrsett.Reactions on the Judgment.The Supreme Court judgment has to be viewed in context of the peculiar facts. Often bad facts lead to laying of harsh law or bad law..In this case the Hon’ble Supreme Court was considering factum of distribution of telecom licenses on a first come first basis when the then telecom minister A Raja had not followed this policy. As per facts enumerated in the judgment, after announcing 1.10.2007 as the cut off date, the date was changed to 25.9.2007 in 24 hours. Even though the finance ministry and the law ministry did not approve of pricing of spectrum on the 2001 basis, the licenses were arbitrarily not auctioned. Even though TRAI has recommended pre-qualification criteria like experience and other criterions, most of the licenses were given to realtors. In fact, 85 out of 112 have not even been rolled out..In these circumstances the Court has pronounced the judgment and has gone to the extent of holding that first come first served policy is unconstitutional. I may not agree with this aspect as statutes like Mines and Mineral Regulation Act provide for the first applicant to get a mine lease as a matter of right. So to say in all cases first-come-first policy is unconstitutional may be an extreme view, but as I said bad facts can lead to harsh law or consequences..Impact on FDI .I do feel that a few investors like Telenor and Etisalat could have found out in any due diligence that the grant of license was a risk as they were subject of a raging controversy. In fact Delhi High Court on July 1, 2009 in a proceeding by S-Tel had set aside the cut off date of September 25, 2009 as arbitrary. Cancellation of licenses application was filed in early 2010. All these factors should have been looked at by the potential investor while conducting their legal due diligence. Despite all this, if they invested and rolled out services, the Companies took a risk, which is a business decision. They can still sue the Indian partners for refunds. Of course, if the facts in the judgment on which cancellation are based are not correct they can file a review..I therefore, agree that it sounds harsh that foreign investors’ investment has been prejudicially affected by the judgment but this will not affect FDI or the economy..Manoj Kumar, Managing Partner Hammurabi Solomon .Reactions on the Judgment.In my view, it is a landmark judgment. For the first time, the Hon’ble Supreme Court has held that the policy was not implemented correctly and has gone to the extent of actually quashing the government action..There are certain logical conclusions of any decision, like the present one. For example, the third parties who are impacted because of the cancellation, they are the real stakeholders and it is a well-accepted principle of law that if any third party’s interest is likely to be impacted, such person should be heard and the principles of natural justice should be followed. The lenders and consumers are the two classes of such stakeholders who are actually going to be hit the most as a result of this judgment, but they have ironically not been heard. A huge amount of lending by banks to these telecom companies lies exposed at risk and such lenders don’t know where to go. Most of these companies operate through expensive telecom equipments, which are supplied by equipment providers on lease or revenue share basis. So such equipment suppliers and the like would be left in the lurch. They ought to have been heard and any final decision on this with respect to the cancellation part should have been taken after hearing their concerns. It does not help anybody by just cancelling and stopping the business one fine day. Similarly, consumers are put in a very anti-competitive environment as they are now on the mercy of the same old players who have charged high rates of Rs. 32 a pulse or Rs. 16 a pulse and that too for much poorer quality than now..Correctness of the Judgment.This is the judgment of the Supreme Court. It won’t be wise to sit on the correctness or otherwise of what the Hon’ble judges have held. The only thing I would like to state here is that yes, the records very clearly indicated that certain actions of making arbitrary policies of first come first serve basis inherently lacked transparency and that the Court has clearly said that this is wrong. The Court has rightly said what is wrong, is wrong..When I said that the judgment did not go the last mile, what I meant was what could have been done before directing the cancellation of the said licenses. I think there is some space to cover there because the judgment doesn’t seem to be giving directions to chase the grey money, which the exchequer allegedly lost or for the refund of fees paid to the government. At least the lenders who had funded the license fee, probably could have been safeguarded to that extent..Whether judgment provides clarity.Far from it. First, the Court is not making the policy. Second, the Court has directed TRAI to make recommendations to the government to come out with the new norms as to how the auctions will be done. I don’t see how this is adding clarity except for the fact that if there occurs a mischief once more under the new policy, then the Court is sitting there to strike it down, again..In fact the judgment has affected adversely. All the benefits that the Vodafone judgment brought to us i.e investor confidence, predictability of government action etc. has been now eroded and that is a huge downside of the impact of this judgment. Because the licenses have been operational for so many years, the certainty of the government action was something that ought to have been considered by the Court..Varied third party interest had since been created to such an extent that status quo ante was not possible anymore. But I guess we have to live with the judgment of the Supreme Court unless it is reviewed or changed by the Court..Clearly somebody who was assisting the Court could have visualized that if all these licenses go, we will return to an anti-competitive environment and the Competition Commission could have been called to suggest a strategy with respect to the implementing the cancellation of licenses in a manner that consumers are not put to prejudice and the services are not interrupted etc. I don’t know why this did not happen!.Impact on the telecom sector .The former telecom players would have an upside in the short run. The bankers who had funded the license fees and the new licensees last time around have already lost the money and so there would be squeeze on liquidity available. The competitive element is gone because the earlier telcos who have lost their licenses may not have the bankers backing them once again. In the last five to six years, telecom was one of the areas, which turned some India telcos into global companies. India’s telecom story would definitely take a beating!.Fresh Auction.We need to understand that this auction is for licenses for both, circles and spectrum allocation. When you are auctioning the spectrum obviously the existing players will have larger muscle power and they may want to corner the additional spectrum as much as possible. This is where the possibility of having 4 or 5 players which was the whole reason for the last exercise. They needed to have a format of 4 service providers in each circle, which may take a beating. In the auction, the government may not be able to ensure that. So the policy of thrusting competition at the circle level to benefit the consumers may take a beating through an auctioning process unless there is some method evolved to weed out conflict of interests. Unless those parameters are set out and unless dominant players who are likely to take undue advantage are weeded out, this auction will probably not serve the purpose. First come first serve policy was wrong but the auction is also not the right approach if it would lead to defeating competition and consumer interest. The stage that the telecom industry in India has reached, the Competition Commission of India (CCI) should be roped in to work with TRAI to take care of the consumer interest as well alongside by ensuring that any dominant or anti-competitive position does not emerge. That is something that has to be done. Hopefully if TRAI starts thinking on these lines, we may see this happen..Review .Yes definitely I think this judgment merits a relook. Review is one option..Mohit Saraf, Senior Partner, Luthra & Luthra Law Offices.Initial reaction on the judgment .I think if you look at the entire judgment, the Court has observed one, that probably the policy was wrong and second, that the implementation was more wrong. The Court has appreciated the arbitrary actions taken by the then telecom minister, the way he disregarded the advice and views of other concerned ministries and even the Prime Minister, however, really seen, the Court has not gone on to take on record any evident positive collusion between the telecom companies and the telecom minister. Given this, while it is true that acquisition of license by certain telecom operators was under a wrongly implemented policy, but whether there was any wrongdoing on their part is still open. The cancellation of their license could have been justified had culpability been established on part of telecom licensees, however, the same is still an issue at the trial court level. But by cancellation of the license and imposition of penalty, it seems as if the Court has already determined the telecom companies guilty, which can be viewed as something which may prejudice the fair trial at the trial court level. The Supreme Court has also erred in noticing that, if any of the licensees are tomorrow not convicted by the trial court, even then they would stand punished by the effect of this judgment..Also, I see that what is to be actually examined is that if a benefit has occurred to an entity on account of a wrongly implemented Government policy, whether such benefit can be taken away subsequently, especially when the grantee has substantially altered its position, such as incurrence of huge expenditure, relying on the Government’s action. The concepts of estoppel and legitimate expectation should also be taken into consideration, which have been deliberated upon in the past in various judicial pronouncements..The Court has ordered the cancellation of licenses in four months. In fairness, the licensees should have been allowed to continue business until the fresh auction takes place, or the Government should have been directed to complete the auction process within the period of four months such that the licensees could continue to operate and conduct business. The licensees should have been given an opportunity to pay the difference between the amount that they have paid and that discovered through the auction. While it is a thought, the methodology could have been worked out, such as grant of an extension in the license, so as to protect the interests of the several stakeholders involved and at the same time, ensure that the loss to the exchequer is made up..Another way to look at it is that, while everyone is talking about migration by the 79 million mobile subscribers to other telecom operators, it will actually be a migration to the large telecom service providers who are not obliged to pay anything to the Government. On the other hand, upon loosing their subscriber base, the operators whose licenses have been cancelled, would not have any incentive to bid in the fresh auction. As a result, the opportunity for the Government’s financial loss to be made up by the auction, itself appears to have been lost..Implications of the judgement.On a perusal of the judgement, one would realize that the Court has really harped upon auction being a better methodology than the first cum first served basis, for providing resources under the control of the State (such as spectrum) to private parties. There is no doubt that auction is a better process for such distribution. Actually seen, in India’s infrastructure sector, even today auction is adopted in 70-80 percent of distribution processes. However, I think, process of an auction is successful and effective when objectivity is the norm. Meaning thereby, the technical specifications and financial criteria to be met are clearly spelt out and are not subject to varying interpretations. In developed economies, auctions are under specific procurement laws and have expert departments looking after procurement. There are also clearly set out bid protest mechanisms with experts overseeing them. In India, unfortunately, there do not exist proper procurement laws and auctions have a substantial degree of subjectivity involved. The objective of such processes is mostly diluted with non-transparency, leading to their abuse. Ones with greater political reach often turn up the winners. This is rather evident from the fact that India’s concession business has not seen participation from most large international developers in the past. Thus, while the process of auction has been endorsed by the Supreme Court in the judgment, the ruling does not take into account the practice associated with auctions in the country and lack of proper laws, which also have a huge impact on implementation. I also think that this judgment dilutes the ‘clarity and certainty in law’ aspect which was very recently emphasized upon in the Vodafone judgment. Certainty in law is a cornerstone for investor confidence and consequently, the growth of an economy. The judgment, unfortunately, looks back..Another point is that if you look at developed economies, you will feel that the law and business are interlinked. Law is a means to get to an end which is a civil society where rights are respected. What this judgment should have ideally achieved is maintenance of an investor favourable climate, and at the same time sending of strong signals against corruption. However, while punishing corruption, the Court has compromised the investor friendly climate, and this in my view is the most damaging impact of the ruling. Ours, unfortunately, is a capital deficit economy and foreign investment and international participation are fundamental pre-requisites for our growth story. The Court did not appreciate that there is an amount of Rs. 55,000 crore (approx $12 Billion) at risk. It has ignored the fact that people who got the license and the investors who entered post grant of license have invested a huge amount of money in this sector, which in a stroke, is at peril. The Supreme Court in my view to an extent got carried away in the crusade against corruption. I think we are all for that but in my view the effect on business was not much appreciated..Foreign Investors Suing Indian Partners.The inter-se agreements between the Indian partners and the foreign investors would be in the nature of joint venture agreements containing rights and duties of each and representations, warranties and indemnities being promised to each other. An interesting point here is that had the licenses been cancelled on account of culpability of the Indian partners, it would have easily allowed the foreign investors to take recourse against the Indian partners and claim indemnities. However, while the culpability issue is still at the trial court level, the licenses have been cancelled on account of a defective Government policy. This, in effect, compromises the recourse, which foreign investors may have against Indian partners..Impact on Consumers .I think that migration by 79 million affected subscribers to other operators is one thing, but there are much bigger issues involved here. In the last few months we have been hearing about the large older players talking about the tariff going up by 30 percent. Now what you are doing is making a polarized market as also seen from the TRAI chairman saying that all customers can migrate in 4 months time. It will be nothing but to ensure that the large old players become bigger with the small being extinguished, so obviously that in my view gets into serious competition law issue. Actually, this can lead to market dominance which is an issue which the Competition Commission should look at and again I think challenges are involved and I think various regulators like CCI, TRAI should work together..Akil Hirani, Managing Partner Majmudar & Co .The cancellation of the telecom licenses issued in 2008 will impact FDI because foreign investors seek certainty in these types of matters, and will be worried about post facto revocations and the sanctity of dealings with the government..However, on the flip side, the message that the Supreme Court has sent out is that corruption will be dealt with strictly and anybody complicit (whether directly or indirectly) will be penalised..The licensee companies are free to apply for a continuance of their licenses by paying the extra price that may be sought by the government under revised terms.