Why it’s crucial for apex court to listen to Prashant Bhushan’s petition on Reliance Jio

Before it turned into a courtroom spat, it had started as another court hearing.

On January 12, while hearing a public interest litigation against Reliance Jio Infocomm, the Supreme Court of India challenged the credentials of the petitioner, activist-lawyer Prashant Bhushan’s Centre for Public Interest Litigation. A three-judge bench, including Chief Justice TS Thakur, asked if the NGO was taking the system “for a ride”. It raised the question whether the non-profit nature of the NGO could be misused to settle scores with corporate rivals or for personal vendetta.

Shorn of rhetoric, the courtroom argument was really about one crucial question. Is the public interest litigation petition against Reliance Jio Infocomm really in public interest? Or is it akin to private interest litigation, filed at the behest of the company’s business rivals?

Four days after the courtroom drama, Reliance Jio Infocomm, an unlisted subsidiary of Reliance Industries Limited, India’s biggest private corporate entity headed by the country’s richest man Mukesh Ambani, announced the second-biggest rights issue of shares ever to raise Rs 15,000 crore ahead of the launch of its fourth-generation telecom services.

Having already worked out arrangements to share and trade electromagnetic spectrum with companies controlled by younger brother Anil Ambani, Mukesh Ambani’s Reliance Jio is expected to give stiff competition to established players, among them Bharti Airtel (led by Sunil Bharti Mittal), Idea Cellular (of Kumar Mangalam Birla) and UK-based multinational Vodafone.

If the Supreme Court acts on the petition moved by Bhushan and restrains Reliance Jio on the ground that the government allegedly allowed the company to gain at the expense of the exchequer, will such a move not benefit the company’s corporate rivals? Of course, yes.

But does this imply that the apex court should not act against Reliance Jio if there is sufficient evidence to suggest that the Union government’s Department of Telecommunications allowed the company to reap undue gains by manipulating the auction procedure, changing policies, and by turning a blind eye to transgressions of the law? Of course not.

What are the accusations?

Given the seriousness of the accusations against the Department of Telecommunications and Reliance Jio, there’s no doubt that they merit a second look, hopefully by a high-level inquiry instituted by the country’s Supreme Court.

First, it has been alleged that the company obtained spectrum in an illegal manner from another firm or, put another way, the spectrum auction was rigged.

Secondly, it has been claimed that government policies were changed post-auction to allow Reliance Jio to use 4G spectrum not merely for data transfer but for voice services as well. By letting Reliance Jio get a licence for data services at a cheaper rate and then converting it into one that includes voice telephony as well, the government not only created an uneven playing field but also caused a major loss of revenue to the exchequer.

Thirdly, it is alleged that, in a display of favouritism, Reliance Jio was continued to be allowed to pay a lower spectrum usage charge.

A report tabled by the Comptroller and Auditor General of India in Parliament on May 8, 2015, estimated that the “undue benefits” extended by the government to Reliance Jio caused a loss of Rs 3,367 crore to the exchequer. A draft report prepared by the CAG in August 2014 had estimated the same loss to be over Rs 19,000 crore higher, at Rs 22,842 crore.

What led to this dilution in numbers? Senior advocate Harish Salve, who represented Reliance Industries Limited in the Supreme Court, claimed the discrepancy came about because of misinformation “planted” by someone in the office of CAG. Then again, documents with the Supreme Court as well as top bureaucrats who spoke to this writer on condition of anonymity indicate there might have been unbearable pressure on different levels in the office of CAG.

What are the facts?

In February 2010, the Union government’s Department of Telecommunications issued a notice inviting applications from companies to participate in the auction of third-generation and fourth-generation spectrum. Spectrum is best understood as a range of radio frequencies over which travel all wireless communications signals. Like land or water, these frequencies are the property of the people of India, and their custodian is the government, which allocates them for various applications, including technologies like 3G and 4G.

In its 2010 notice, the Telecom Department laid out generous preconditions. It said that any corporate entity that holds a licence for Unified Access Services or Cellular Mobile Telephone Services or as Internet Service Provider could bid for the spectrum. Any entity that could give an undertaking that it would obtain a Unified Access Services or Internet Service Provider category ‘A’ licence as a “new entrant nominee” licensee before starting operations was also allowed to participate in the auction.

Since these conditions were benign, one of the companies that got to enter the fray was Infotel Broadband Services Private Limited. According to the draft CAG report, IBSPL was a “front” company used by Reliance Jio Infocomm to acquire broadband spectrum in the country.

At the time of the auction, IBSPL was a tiny internet service provider with a paid-up capital (from its shareholders) of Rs 2.51 crore, a net worth of Rs 2.49 crore, and just one leased line client. On the telecom regulator’s list of internet service providers, IBSPL ranked a humble 150. Its promoter was Anant Nahata, the son of Mahendra Nahata, who is one of the promoters of Himachal Futuristic Communications Limited, a manufacturer of telecom products and a provider of telecom services.

Despite its size, IBSPL was able to meet the financial requirement for spectrum bidders – an earnest money deposit (or money paid to demonstrate definite intention to bid) in the form of a bank guarantee from Axis Bank worth Rs 252.5 crore, a sum that was hundred times its net worth.

The e-auction was conducted over 16 days beginning May 24, 2010. Because of the high prices, major players such as Reliance Communications (headed by Anil Ambani), Vodafone, Idea Cellular and Tata Communications exited the auction of licences for the 22 telecom circles (or geographical areas).

Yet, IBSPL, with its negligible net worth, was allowed to proceed by the government while the bids rose. No attempt was made to stop the auction either by the Telecom Department or an inter-ministerial committee, comprising officials from many other departments, which was set up to monitor the auctions and approve the outcome.

In the end, IBSPL won the bid and acquired 20 megahertz unpaired 4G spectrum for all 22 telecom circles in the country at a final price of Rs 12,847.77 crore – which was 5,000 times its net worth. The winning bid came against a reserve price of Rs 1,750 crore, which was purposely kept low because the subsequent rollout of 4G infrastructure would require additional investments.

The story gets even more convoluted here on.

Was the process followed?

The electronic auction for 4G broadband wireless access spectrum ended on June 11, 2010, after 117 rounds of bidding. The provisional results recommended by the inter-ministerial committee were to be approved by a Committee of Secretaries to the government of India, headed by the Cabinet Secretary and including the Finance Secretary, the Secretary to the now-defunct Planning Commission and the Secretary of Department of Telecommunications.

Instead, the provisional results were declared on the afternoon of June 11 with the approval of the inter-ministerial committee. The winner was a small, little-known company, Infotel Broadband Services Private Limited, that was promoted by Anand Nahata, son of Mahendra Nahata.

According to the August 2014 draft report of CAG, when the Committee of Secretaries met on June 12, 2010, to consider the recommendation of the inter-ministerial committee to approve the provisional results, it was informed that the “auctioneer was satisfied with the conduct of the auction process”. It was also told that “the electronic auction system was not compromised from both security and competition aspects and there was no indication of any collusive and coordinated bidding”.

The committee was further informed that the details of the 4G auction, including the provisional results, had been scrutinised by an inter-ministerial committee and were recommended for approval.

Meanwhile, on June 11, at an extraordinary general meeting of its shareholders called at short notice, Infotel Broadband Services Private Limited raised its authorised share capital (the maximum capital a company can allocate to its shareholders) by 2,000 times – from Rs 3 crores to Rs 6,000 crores – by issuing 75% of its shares to Reliance Industries Limited, a publicly listed company. This made IBSPL a subsidiary of Reliance Industries.

All this was done before IBSPL’s memorandum of association was changed and its authorised share capital recorded by the Registrar of Companies in the Ministry of Corporate Affairs.

The formalities were sought to be completed six days later, on June 17, after IBSPL authorised its board of directors to allot 4.75 billion equity shares of Rs 10 each to Reliance Industries Limited and 250 million shares to Infotel Digicom Private Limited – also promoted by the Nahatas – totalling Rs 5,000 crore. Reliance Industries now owned 95% of the company, with 5% held by Infotel Digicom.

On June 19, 2010, IBPSL ceased to be a private limited company and became a public limited company. Three years later, on January 22, 2013, it was renamed Reliance Jio Infocomm Limited.

Was Nahata’s firm a 'front'?

The takeover of IBSPL by Reliance Industries made headlines. The draft CAG report says that Anant Nahata had confirmed on television on June 11, 2010, that talks were on with the Reliance group. In fact, a day earlier, on June 10, the Economic Times had mentioned that IBSPL could be taken over by Reliance Industries, with all-India 4G spectrum prices touching Rs 12,257 crore.

The auction of 3G/4G spectrum, described as a “high risk” subject, was included in January 2013 in the audit plan of the Director General of Audit (Posts and Telecommunications) in the office of CAG for 2013-’14. The audit was to be done under the direct supervision of Director General RB Sinha. However, the Department of Telecommunications took its own sweet time providing the records – they came only in September that year.

The first audit note was sent to the Telecom Department on September 27, 2013. A second note was sent two months later. The department responded in stages between January and March 2014.

By August that year, the team led by Sinha had prepared a draft report. It noted that IBSPL had not declared its relationship with Reliance Industries as an associate or partner in its application for participating in the auction for 4G spectrum when details of all applications were disclosed on the website of the Department of Telecommunications on April 6, 2010. As a result, competitors of IBSPL were not aware of the interests of RIL in the auction of 4G spectrum.

More shockingly, the draft report revealed that the bank guarantee of Rs 252.50 crore issued by Axis Bank in favour of IBSPL had been tampered with. The name of the beneficiary – that is, IBSPL – had been handwritten in ink on the body of the bank guarantee after erasing what was written earlier.

Not only had the inter-ministerial committee permitted a tiny internet service provider with a net worth of Rs 2.5 crore to participate in an auction for all-India 4G spectrum with a minimum “reserve” price of Rs 1,750 crore, IBSPL had bid aggressively during all rounds of the auction in sharp contrast to other financially-stronger firms. The inter-ministerial committee didn’t question IBSPL when it sold 95% of its stake to RIL within hours of the completion of the auction.

This, however, wasn’t the end of the manoeuvrings. As the next part of this story will show, the way Reliance Jio was able to get a licence of data services converting into one for internet telephony also raises a lot of questions.

The second part of this series can be read here.