2G: This is how Vinod Rai arrived at his infamous notional loss estimate of Rs 1.76 lakh crore

The CAG’s performance audit process invited a lot of attention and criticism, to put it mildly, and not least for the so-called humongous figure that my team and I “conjured up out of nowhere”, establishing the loss to the national exchequer. There was and has been a lot of debate on why the CAG computed the potential or presumptive loss to the national exchequer. One needn’t go further than the March 2002 auditing standards released under the signature of the then CAG VK Shunglu:

“With regard to fraudulent practice or serious financial irregularities detected during audit or examined by audit, a written report should be prepared. This report should indicate the scope of audit, main findings, total amount involved, modus operandi of the fraud or the irregularity, accountability for the same and recommendations for improvement of internal control system, fraud prevention and detection measures to safeguard against recurrence of fraud/serious financial irregularity.”

It is clear that audit is duty bound to report on any perceived loss of revenue.

It wasn’t only the fact of calculating the loss, but also the methodology of computing it that attracted widespread attention. The formula applied for computing the loss was used after requisite deliberation, and based on a logical understanding of tax laws in India and abroad. The other option before the audit team was to use mathematical or econometric modelling. Such models are premised on certain assumptions, which may or may not hold true in real life market situations and would thus be vulnerable to criticism. Hence, the modelling methodology was given the go. Audit was also aware that too much was at stake for far too many important and influential people, and it could not take the risk of having its computation being vulnerable to the intense examination it was bound to be subjected to. It was thus decided to use data and other indicators which were already in the public domain. The parameters that were thus used were:

• the rate offered by S Tel, as against what the government had fixed [S Tel was one of the applicants for spectrum license];
• the sale of equity of new licensees, as recorded in the stock exchange;
•  and the rates which emerged after the 3G auction. 

Parameter 1: Let us accept the contention of the DoT that the FCFS procedure was then the established practice, and that it was only natural for the department to take that route.

All the concerned departments, including the PMO, had objected to the entry fee of 2001 being made applicable for new operators in 2008. The DoT decided, against such advice, to charge the entry fee discovered in 2001, even for new licensees under the Unified Access Services (UAS) regime. The entry fee for a pan-India UAS licence discovered in 2001 was Rs 1,651 crore. In view of the rapid changes which had catapulted teledensity from 3.58 in 2001 to 26.22 in 2008, the incongruity of applying that price was staring everyone in the face.

When the DoT was in the process of releasing spectrum at that price, S Tel, one of the bidding companies, wrote to the prime minister (in November 2007) volunteering to pay an additional revenue share of Rs 6,000 crore. In a subsequent communication (dated 27 December 2007), the company enhanced this offer to Rs 13,752 crore over a period of ten years for an allotment of 6.2 MHz. It also offered to increase its bid in the event of a counter bid. These developments occurred much before the LoIs were issued, providing ample time for the government to rethink and re-evaluate its course of action.

There could have been no clearer indication of what the market could bear for allotment of spectrum. Had this price been accepted by the DoT, they would have realised Rs 65,909 crore as against Rs 12,386 crore realised for 122 new licences and 35 licences under dual technology. In fact, upon finding that their offer had not being accepted, S Tel went to the Delhi High Court and got the court to direct the government to reconsider its offer. When even the reconsideration did not yield positive results, the company approached the Supreme Court. This is indicative of their seriousness to pursue their bid. They finally withdrew their bid in March 2010, when their competitors had already got their UAS licenses along with spectrum and had established their infrastructure.

Very many arguments based on technicalities have been offered against this parameter being used by the CAG. However, the entire narration of the sincere attempt by S Tel, and the substantially higher price it was offering in comparison to that fixed by the DoT, is clearly indicative of the revenue foregone by not applying a realistically benchmarked price, based on a reading of what the market could bear.

Parameter 2: The total foreign direct investment (FDI) permissible to an applicant company was 74 per cent.

The level of foreign investment that several new entrants, along with existing licensees, were able to attract after getting the spectrum license was exceedingly illuminating. In the case of Unitech, which had no previous experience in the telecom business, Telenor, a Norwegian company, agreed to acquire a 67.25 per cent stake for Rs 6,120 crore. Tata Teleservices sold a 27.31 per cent stake to NTT Docomo at a value of Rs 12,924 crore. Even Swan Telecom sold 44.73 per cent stake to Etisalat International at Rs 3,217 crore.

Is that not clearly indicative of the value the market attached to the 2G spectrum licence? Even a cursory back-of-the-envelope calculation will indicate that licenses which could have fetched between 8,000 to 9,000 crore were priced at 1,658 crore by DoT. Hence, one reaches the the inescapable conclusion that the revenue which could have accrued to the national exchequer was gifted to the new licensees in the form of huge capital infusion for enriching businesses. Can the CAG then be faulted for its commonsense conclusion? Here again, various arguments have been trotted out that this was for additional equity being infused and was not a direct profit to the licensees. Again, did this not indicate that the scrip of that company could command that price only after being awarded the spectrum licence?

Parameter 3: The avowed government policy of FCFS gave way to the process of auction for 3G allocation.

This was completed on 31 May 2010, and fetched the government handsome revenue. The rationale or logic of this comparison as a parameter for computing loss lies in the CAG taking note of TRAI’s report of 2010, wherein it stated that 2G licensees were, in fact, offering more than 2G capability: “While comparing spectral efficiency and other factors, it is fair to compare the existing 2.75G systems with 3G systems.” Hence, we compared the revenue accrual of 2G with that of 3G.

And this brought us to the presumptive loss figure of Rs 1.76 lakh crore. These are merely indicative figures. They convey an order of magnitude. No doubt, the media and public imagination were captured by this figure, and the government got fixated on it.

In computing presumptive losses, we have clearly stated that while the fact of loss to the national exchequer can hardly be denied, the quantum of loss can be debated. We sincerely believe that the government itself validated our computations by debating the loss – from the now famous “zero loss hypothesis” to the Rs 32,000 crore mentioned by the CBI.

Excerpted with permission from Not Just An Accountant: The Diary Of The Nation’s Conscience Keeper, Vinod Rai, Rupa Publications.