Reliance Must Pay Huge Dues for Jio’s Spectrum: MP
Image Courtesy: The Pioneer
Bengaluru, Gurugram: In a letter dated September 20 to Union Communications Minister Ravi Shankar Prasad, Congress member of the Rajya Sabha, Kumar Ketkar, has claimed that the government’s Department of Telecommunications (DoT) is failing to collect huge amounts running into lakhs of crore rupees in back payments of Adjusted Gross Revenue (AGR) dues that it is entitled to claim from Mukesh Ambani-headed Reliance Industries Limited (RIL).
Ambani is India’s and Asia’s richest man and also one of the world’s richest men. RIL is the single largest privately-owned corporate entity in the country.
Ketkar’s letter (a copy of which is reproduced below) makes two points. First, the 2019 judgement by the Supreme Court of India in the AGR case determined that the total revenue of a telecommunications licensee from all sources is to be used as the base revenue to calculate AGR.
Second, publicly available information about the 2010 auction of broadband wireless access (BWA) telecom spectrum indicates that a tiny company named Infotel Broadband Services Private Limited secured fourth generation (4G) spectrum licenses across the country worth around Rs 12,850 crore.
The MP claims that Infotel, which was subsequently taken over by RIL, acted as its “veil” or as a “front” company.
Ketkar’s letter says that as “per public knowledge tiny Infotel Broadband Services Pvt Ltd… , with a Net Worth of Rs 2.49 crores, was bank-rolled by Reliance Industries Ltd … for Security Deposits of Rs 252.50 crores, and for winning bids of a staggering Rs 12847.77 crores. Infotel was the veil and RIL was the true Licensee in that spectrum auction. (it was only after the auction was over that the front entity was converted into subsidiary of RIL, and later renamed as Jio).” (Emphasis in the original letter.)
Drawing Prasad’s attention to “the Adjusted Gross Revenue AGR judgment of 24.10.2019 of the Supreme Court bench” the letter says “post that judgment, the Dept of Telecom… itself confirmed on affidavit to the Supreme Court on 24.08.2020 that “...adjusted gross revenue is based on entire revenue generated by a telco and is not dependent only on revenue from spectrum.” (Again, emphasis in the original.)
Based on these “facts,” the Congress MP’s letter argued that “as the true telco licensee, RIL is required to pay AGR on its entire revenue, even revenue unrelated to spectrum, from 2010 onwards, with penalty and interest thereof,” adding: “The amounts will be multiple lakhs of crores. The DoT have been strangely inactive in acting upon its own clarificatory affidavit. The only AGR thus far computed has been restricted to Infotel, not to the true Licensee RIL.”
The letter, which is also copied to Union Finance Minister Nirmala Sitharaman and the Secretaries, DoT and Ministry of Finance, calls upon “the House (of Parliament) and the people of India” to be “urgently informed what steps the government is taking to collect its dues.”
Ketkar’s letter comes shortly after the Supreme Court’s September 1 decision on the AGR issue. While the apex court’s October 2019 verdict had sought to settle the more than a decade-old debate on the definition of what constitutes gross revenue and “adjusted” gross revenue, telecom companies (telcos) and the DoT had approached the Supreme Court seeking its permission for a staggered payment schedule of the massive dues that telcos owed to the government as a result of the court’s decision.
In its 2019 judgment, the Supreme Court had agreed with DoT’s arguments and declared that AGR was to be calculated by including all revenues earned by a spectrum holder, including those not involving the direct use of spectrum. This resulted in demands for massive sums of money from the telcos by DoT, including from two of the main competitors of Reliance Jio (RJio): Rs 58,254 crore from Idea-Vodafone, Rs 43,980 crore from Airtel, and Rs 16,798 crore from Tata Teleservices (which has been acquired by Airtel).
While the telcos had sought a 15-year payment schedule for past dues after the DoT had proposed a 20-year schedule, the Supreme Court granted only a 10-year payment schedule to the telcos in its September 1, verdict.
However, RJio has been conspicuous in its absence from the AGR issue. The dues that the older telcos have stacked up flow from revenue demands made by the DoT around 15 years ago that the companies had challenged through the country’s telecom regulatory mechanism. RJio, however, which acquired its spectrum license in 2010 and only started operations in 2016, was never a party to the original challenge and claims to have met all the revenue demands made on it by DoT.
MP Ketkar echoes the contention made by an unnamed former chief executive officer of a telco in a NewsClick report of September 4 by the present authors, who challenges this claim that no additional AGR dues arise on RJio as a result of the Supreme Court’s 2019 verdict. The key question that has been raised is: Who is the actual spectrum licence holder, RJio or its parent company RIL?
The answer to this question lies in an auction of BWA spectrum that the DoT conducted over a decade ago. In May and June of 2010, the DoT conducted an auction of spectrum for telcos to provide services using 3G and 4G technologies. In each of India’s 22 telecommunication “circles” (or regions) three to four 5+5 MHz (megahertz) blocks of 3G spectrum in the 2.1 MHz band and two 20 MHz blocks of 4G broadband spectrum in the 2.3 MHz band were up for grabs at the auction.
With virtually every Indian telco that was eligible for bidding in the auction, a small and till-then almost unheard-of company named Infotel Broadband Services Private Limited turned out to be the big winner of the 4G broadband auction, winning blocks in each of the 22 circles, at a total bid of Rs 12,847.44 crore. Incorporated in 2007, Infotel was a company with a paid-up capital of Rs 2.51 crore, a net worth of Rs 2.49 crore, a bank balance of Rs 18 lakh, and a single client worth revenue earnings of Rs 14.78 lakh.
On June 11, 2010, just after the auction results were announced, Infotel announced that it was being taken over by RIL. At an extraordinary general meeting of Infotel’s shareholders, it raised its authorised share capital from Rs 3 crore to Rs 6,000 crore and later issued 75% of its shares to RIL making itself a subsidiary of RIL. On the same day, Anant Nahata, Infotel’s promoter, revealed on television that talks had been on with the Reliance group since the start of the auction. Six days later, RIL increased its stake in Infotel to 95% ownership. (As an aside, Mahendra Nahata, father of Anant Nahata and one of the promoters of the Himachal Futuristic Communications Limited or HFCL group, went on to become a member of the board of directors of RIL.)
In 2011, after the auction, Infotel applied to DoT for permission to convert its licence to use the 4G spectrum to provide broadband wireless internet services across the country, to a different type of licence that would allow it to provide voice and data services through LTE or long-term evolution, then a newly developed 4G technology. In January 2013, Infotel, by then an RIL subsidiary, was renamed Reliance Jio. Shortly thereafter, in February that year, RJio was granted the licence it wanted on making a payment of Rs 1,673 crore, against the objections of the technical wing of DoT and multiple DoT committees.
Draft Report of CAG
An investigation into the deal was later done by the Comptroller and Auditor General (CAG) of India, the constitutional authority responsible for overseeing public finances. A draft of the CAG’s report, which was leaked to the media in July 2014, found RIL’s hand behind Infotel’s actions throughout the auction.
The draft report alleged that a bank guarantee worth Rs 252.5 crore that had been obtained by Infotel from Axis Bank and submitted to the DoT to qualify to bid in the auction contained an apparent “forgery.” It further alleged that the bank guarantee had been tampered with and the name of the beneficiary – that is, Infotel – had been written by hand in ink after covering up the previous beneficiary’s name using white fluid.
When an article had been written on this subject in June 2016 in the Economic and Political Weekly by the authors of this article, detailed questionnaires were sent to the following individuals and representatives of companies to elicit their responses: Minister Ravi Shankar Prasad, who, incidentally, served as a legal consultant for and was paid a retainer by RIL, between April 2013 and March 2014, J S Deepak, the then Secretary, DoT, and spokespersons of RJio, Bharti Airtel, Idea Cellular, Vodafone India, Aircel India, Tata Teleservices and Qualcomm India. Till the time of publication, only one response was received, namely, from the spokesperson of the Bharti Airtel group who declined comment. After the report had been published in EPW, a spokesperson of Axis bank said there was nothing “irregular” about the draft given by Infotel.
The CAG’s draft report noted that Infotel had not declared its relationship with RIL as an associate or partner in its application for participating in the auction, “violating the transparency and sanctity of the auction.” The draft report also stated that Infotel had violated the confidentiality clause of the auction rules, and indicted the DoT as having “failed to recognise the tell-tale signs of rigging of the auction right from the beginning.” The CAG’s draft report also claimed that Infotel/Jio was hugely under-charged in order to convert its 4G broadband license to a “universal license” under which it could offer voice and data services, estimating the “undue advantage” gained by RJio to be worth Rs 22,842 crore.
Many of the observations in the draft report were omitted from the final report of the CAG that was presented in Parliament on May 8, 2015. The final report sharply indicted the DoT for providing an “undue benefit” to RJio while allowing RJio to offer voice services using BWA/4G spectrum, whereas the licence the company had acquired in the 2010 auction did not allow it to include voice telephony among the services it could offer. A Unified Licence—which allowed the transformation of RJio from an internet service provider into a full services provider—was made available to it quietly, and as the CAG report alleged, at a price that was far below the prevailing market price. However, the final report drastically reduced the estimate of this “undue benefit” from the draft version to a new figure: Rs 3,367 crore.
During a press conference that followed the submission of this report, it became clear that there was more to the story. Suman Saxena, the then Deputy CAG, found herself being pushed to answer a question she had not quite anticipated. The question revolved around the disparity between the report that was tabled, and the one that had been drafted by the CAG nearly a year earlier in August 2014 wherein the “original” figure for the “undue benefit” was Rs 22,842 crore—seven times higher than the figure stated in the report eventually presented. How and why did this happen? Saxena refused to provide any clear answers to this query, and merely said: “A draft is a draft.”
As for the changes between the draft report and the final report of the CAG, arguing before the Supreme Court during a hearing on a public interest litigation (PIL) petition, RJio’s counsel, senior advocate Harish Salve claimed that the discrepancy in the numbers was due to someone “planting” misinformation in the CAG’s office.
According to a reliable source within the CAG, who spoke at that time to one of the writers of this article on condition of anonymity, it was other way around from what Salve had claimed. This person alleged that key government officials were experiencing external pressures. Further, it was claimed that two senior government bureaucrats, who were the members of an inter-ministerial committee, “tried to influence officials” in the CAG’s office to “tone down” the report.
The source rued that the PIL did not name or summon as witnesses or respondents either the CAG himself or the Director General of Audit (Post and Telecommunication) who conducted the audit and had prepared the draft report. Their views were not recorded before the Supreme Court dismissed the petition.
The CAG report on 4G/BWA auction was selected by the Public Accounts Committee of Parliament in May 2015 for examination during 2015-16, but this did not take place.
Is RIL a ‘benami licensee’?
A telecom sector observer who is close to one of RJio’s competitors, speaking on condition of anonymity, described the Infotel-RIL transaction as a “textbook case of a benami arrangement” where “property (in this case, spectrum obtained under a licence) is held by a person (Infotel) and the consideration (a bank guarantee and backing for bids for Rs 12,847.77 crore) of such property has been provided by another person (RIL) and the property is held for the immediate or future benefit (among others, savings on payment of back-dues of AGR savings), direct or indirect, of the person (RIL) who has provided the consideration.”
“Until the announcement of winners by the DoT at 10.50 a.m on June 11, 2010, Infotel was a benamdar or proxy for RIL and the legal relationship between the two got defined during this period,” he alleged.
The Prohibition of Benami Property Transactions Act defines a benami transaction as “any transaction in which property is transferred to one person for a consideration paid or provided by another person.” While the Act has been in place since 1988, the rules for its enforcement were notified by the Central government only in October 2016.
Based on this position, the observer further claimed that “as per the government’s own affidavit in the Supreme Court, AGR has to be calculated on the ‘entire revenue’ of RIL, the ‘real’ owner, including on revenue earned by RIL that was not derived from spectrum, from 2010 till date, with penalty and interest thereof.”
He added: “Common sense says that AGR is attracted on RJio’s revenue as well but neither the DoT nor the Supreme Court’s verdicts envisaged the AGR liability of an entity other than the ‘real’ licensee but which is using the spectrum residing with its parent company and is generating revenue from it.”
This person said it is for the government to spell out with precision the applicability of back-dues of AGR for “non-licenced step-up/step-down entities which use licenced spectrum.”
MP Kumar Ketkar’s letter to Minister Ravi Shankar Prasad has used a similar argument.
On November 3, we emailed the text of Ketkar’s letter to the office of Minister Prasad and to RIL’s corporate communications divisions for their comment and observations. This article will be updated when a response from either is received.
The authors are independent journalists.
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