By September 1996, the department introduced a highly inequitable interconnection regime. Cellular mobile companies had to pay for connecting to subscribers of the existing telephone service providers in the state sector like the MTNL or the DoT. However, MTNL or DoT did not have to pay interconnect charges to private cellular mobile companies, when the former’s subscribers had to connect with the latter’s network. This created an anomalous situation, disadvantaging the cellular mobile service operator once again. It encouraged subscribers to make more calls within the DoT/MTNL networks and avoid making calls from a mobile phone to a fixed telephone. Revenues of the cellular mobile companies, already struggling with a cap on rental fees and high tariffs, took a hit.
But the telecommunications market continued to enjoy its glamour even after such setbacks to the private-sector providers. The government had by then decided to divide the Indian telecommunication market under four broad market categories, depending on their market potential. The first category was for the four metros—Delhi, Mumbai, Kolkata and Chennai. This was followed by three circles: A Circle included the states of Gujarat, Karnataka, Tamil Nadu, Andhra Pradesh and Maharashtra; B Circle covered Haryana, Punjab, Kerala, Rajasthan, West Bengal, Uttar Pradesh (West), Madhya Pradesh and Uttar Pradesh (East); and C Circle included Bihar, the Northeast, Assam, Odisha, Himachal Pradesh and Jammu and Kashmir.
When in January 1995, DoT invited companies to apply for licences to operate fixed-line or wire-line telephone services, the waiting list of subscribers had declined considerably and mobile phone companies would launch their services in about seven months. Yet, as many as sixteen companies submitted as many as eighteen bids for twenty circles in the country. There was no bidder for Jammu and Kashmir and only in 2002 the newly set up state-owned Bharat Sanchar Nigam Limited (BSNL) launched a cellular service in India’s northern-most state. BSNL was set up in 2000 as a wholly owned government enterprise and it had taken over all the services that DoT was running till then.
The bidding process soon became controversial over the government’s right to cap the number of licences. Two companies, Himachal Futuristic Communications Limited (HFCL) and Reliance Infocomm, had submitted the highest number of bids—as many as fourteen out of the twenty circles. One of the winners in these auctions was HFCL, which had partnered with Bezeq, an Israeli government-owned company. The HFCL–Bezeq combine won nine licences for its bids valued at a whopping Rs 85,000 crore. Even before the winning companies could celebrate, the government decided to invoke a provision in the tender documents that allowed it to cap the number of licences for each player.
Accordingly, not more than three licences could be retained for A Circle markets by a single bidder. A major political controversy ensued over the government’s attempt at changing the conditions after the bid results were out. HFCL’s dreams were shattered, as even though it had won as many as nine licences, it could retain up to only three licences as per the policy. There was, however, an escape clause for HFCL to exit from the entire process. The policy allowed a combined entity like the HFCL–Bezeq to move out under such circumstances, but that would mean a revenue loss for the government. The issue was raised in Parliament as well in December 1995, with members of the Opposition political parties demanding the resignation of the communications minister who was responsible for the loss of revenue to the exchequer. The government’s decision not to accept bids lower than the reserve price, like the ones from Reliance, for many C Circle markets, kicked up another row. All these issues not only became controversial but also reached the courts. Much to the sector’s relief, the Supreme Court ruled that the government was within its rights to change the criteria for such bidding processes. But that marked the first big controversy to have hit the Indian telecommunications sector after it was liberalized and thrown open to the private sector and foreign investment. A few more controversies would engulf this sector in the decades that followed.
What contributed to the telecom disruption in the 1990s was the way the government dealt with the policy framework for telecom service delivery by state-sector entities. The government had decided that even as there would be auctions for the award of telecom licences, state-owned operators or entities (which would have included MTNL and the DoT’s service delivery division) would not be permitted to take part in the auction for licences. One of the reasons for taking what appeared to be a strange decision was that the government did not want to use up its own resources to build additional telecom capacity. After all, the logic of the National Telecom Policy of 1994 in opening up the sector to private players was to overcome the resources gap it had faced. This meant that MTNL or the DoT was not able to launch mobile services. But just about a year after the new private players had launched their mobile operations, MTNL decided in October 1997 to start its mobile phone service. This represented a volte-face in the government’s thinking. MTNL, after all, was a wholly owned government company. But the government’s defence, parroted by MTNL subsequently, was that the licence documents had earlier indicated clearly that the government had retained its rights to enter the mobile telephone services segment.
By then the regulator for the telecom industry was already in place. Parliament had passed a law—the Telecom Regulatory Authority of India Act or TRAI—to regulate telecom services, including the fixation and revision of tariffs for telecom services. These were powers earlier vested with the government and from 20 February 1997, TRAI became operational. The government decision to allow MTNL to launch mobile services was contested by the existing mobile service operators. Under the auspices of the Cellular Operators Association of India, the industry moved TRAI to question the government decision. Its argument was that licensing conditions had promised a duopoly regime in each circle, which meant only up to two operators could provide mobile phone services. Allowing MTNL would herald the entry of a third player in a circle and violate the duopoly rights.
TRAI issued a nuanced order—it opined that while the government had the right to give licences, the sequence and need for issuing a new licence had to be cleared and recommended by the regulator. Since MTNL refused to provide any details on why it needed the licence, the regulator was prompted to deny the state-owned fixed-line telecom operator the right to enter the mobile telephony space. The government retaliated and moved the Delhi High Court and by 1998 obtained a favourable order. That was perhaps the first lesson that TRAI learnt. The government was the sovereign authority in laying down the policy, and TRAI as the regulator was empowered to ensure that adequate regulations were in place for a smooth and successful implementation of the policy. If at all there was a perception of a conflict between TRAI and the government in which the former appeared humbled by the latter, it was because of the flawed notion that policymaking could be equated with regulation. Nevertheless, India’s private-sector telecom players could not be blamed for believing that the rules of the game were being changed after laying down the guidelines. This too was a disruption with a significant impact on the industry’s morale and spirit of enterprise.
At another level, the disruption in the telecommunications sector had acquired a new dimension. Financial woes of the private telecom players were getting worse. On the one hand, their finances were adversely impacted as the mismatch between the costs they incurred on payment of licence fees and the revenues they earned were becoming a cause for concern. Soon, many telecom companies began defaulting on the payment of their licence fees to the government. It was a problem that engulfed the entire industry within months and the government was being approached for a more lenient approach while demanding fulfilment of their financial liabilities.
The advent of technology, in the succeeding couple of decades, would play a bigger role in complicating the disruptions for the telecom sector. With Internet service provision gaining in popularity, the government had already decided to throw this sector open to private players. In the next few years, even as private companies began operating Internet services, the challe
nge for the cellular mobile service operators became more formidable. Technology would later allow the use of Internet services as an alternative to mobile telephone, initially for data and later even for voice transmission. For the present, however, the operators were upset by the licence conditions set by the government for Internet service providers. For a fee of one rupee, an Internet service provider could set up the infrastructure and provide last-mile access to the subscribers. Telephone service providers protested that this violated the understanding they had with the government when they entered the space. Their demand: Let the government protect their exclusive right to set up fixed infrastructure for provision of Internet services. Legal recourse as also a plea for financial relief from the government were among options that the basic telephone service providers explored. The adverse impact of technology and its rapid pace were being felt by the telecom players. Over time, the disruption caused by technology had to be absorbed by the telecom companies. Those who took advance action by preparing for the advent and spread of the new technology survived the disruption, and indeed prospered, instead of being swamped by the rapid stride of technological disruption.
The battle in the courtroom got intense as the operators not only demanded compensation and financial accommodation, but also a migration from the current system of paying annual licence fees to a new regime of revenue share with the government. The government won the case, though it recognized the need for a new policy package to address the growing weaknesses in the telecom sector. ICICI, which was till then a development financial institution, was asked to examine the performance of the industry and the need for extending licences for cellular mobile services. The Bureau of Industrial Costs and Prices too was entrusted with the task of assessing the viability of the mobile telephone industry. In its report, ICICI suggested that instead of a ten-year period, the licences for telecom service providers should have a validity of fifteen years, which was promptly accepted.2
A fraught relationship between the telecom players from the private sector and the government made the going tough and added to the complexity of the disruption that had already taken a heavy toll on the industry’s financials. In December 1998, Jagmohan, a retired IAS officer who joined the BJP after having served as Governor in Jammu and Kashmir, took charge of the Ministry of Communications and soon became vocal about his disenchantment with the industry over its failure to pay up the licence fees and requests for either a deferred payment window or migration to a new revenue-sharing system. Less than a month later, Jagmohan caused yet another disruption: He asked the telecom players to pay up 20 per cent of their outstanding dues on account of licence fees. The remaining 80 per cent of the dues could be securitized by the end of February 1999. And if they did not follow the new guideline, the industry would face punitive action, Jagmohan warned.
Even as the industry was weighing its various options, the effectiveness of the telecom regulator came under dispute—a sorry spectacle whose impact on the industry was no less disruptive. In 1999, TRAI ordered that mobile service rentals (the fixed charge that subscribers must pay every month to the telephone company) must increase by 200 per cent and tariffs should be brought down to less than half of the prevailing rate of about Rs 16 per minute. TRAI also introduced the ‘Calling Party Pays’ regime, replacing the earlier system in which all mobile service users were being charged for both their incoming and outgoing calls. Cellular mobile operators were in favour of this move, but it was challenged by other sections of the industry and even by some consumer protection bodies. They questioned TRAI’s authority to deal in a matter that had been decided and determined under the licensing policy. It was a major setback for TRAI and it created greater uncertainty in the telecom market.
Preparing for a New Policy
In just about five years, the telecom industry had raised high hopes for consumers and operators seemed to have got bogged down in a variety of problems. Its market was not growing as fast as it thought it would, given the huge unmet demand for telephone services that existed. The operators were under huge financial pressure on account of the annual payment of licence fees. A regulator had been set up, but its effectiveness was in serious doubt. Complicating the situation further was the government that was treating the private-sector telecom players like the hen that lays golden eggs. But at the same time, the government was influencing policy in a way that benefitted only the state-owned entities in the business of telephony. Fortunately, the Atal Bihari Vajpayee government recognized the need for fixing these problems and set up a committee under the chairmanship of Jaswant Singh, who was then the deputy chairman of the Planning Commission, to examine the need for a new telecom policy that would be able to address the industry’s problems. The committee prepared a draft telecom policy and sought feedback from stakeholders to ensure that there was acceptance of the provisions in the policy that would be finally enforced.
By April 1999, a new National Telecom Policy was announced and addressed many of the concerns that the industry had been voicing for long. More freedom was given to the cellular mobile service providers, allowing them to enter into new areas like carrying their own long-distance traffic within their service areas, direct interconnectivity among different service operators and sharing of infrastructure. The licence period was raised to twenty years, extendable by another ten years. The 1999 policy announced the graduation to a revenue-sharing regime, along with a one-time entry fee. It also legitimized the entry of the third operator in a circle. It said that based on available frequency spectrum band, MTNL or DoT would be licensed to become the third operator in a circle, apart from the already licensed two private operators.
The policy also imposed the obligation of licence fees on the state-sector service providers, but the government was expected to reimburse DoT the cost it would incur for paying the licence fees. The consideration here was that DoT had to incur a lot of social costs for providing services in uneconomic rural or hilly areas. Similarly, the policy package for migrating the mobile service providers from a licence fee model to a revenue-sharing arrangement was subject to their paying an entry fee, locking in their existing shareholdings for five years and withdrawing all legal cases on the matter in the courts. The remarkable success of the National Telecom Policy of 1999 was that all operators signed up for the migration package.
The 1999 National Telecom Policy also beefed up the legal framework for TRAI so that it could function like an effective regulator. The policy had reiterated the government’s commitment to a ‘strong and independent regulator with comprehensive powers and clear authority to effectively perform its functions’. It, therefore, suggested that the regulator’s jurisdiction now covered the private as well as the government-owned operators. It could also adjudicate all disputes arising between the government as a service provider and any other service provider.
The government issued an ordinance in 2000 to amend the TRAI Act, 1997, which was later passed by Parliament. The amended law made two important interventions as far as regulation was concerned and was an indication that the government did not want to give up all its levers of control. The power to adjudicate disputes among service providers and those between the government and service providers was entrusted with an appellate body, the Telecom Dispute and Settlement and Appellate Tribunal. Equally important, the government retained its power to remove any member of TRAI, without referring the case to the Chief Justice of the Supreme Court, as long as the member concerned was given an opportunity to be heard. The amended Act also cut short the tenure of TRAI members from five years to three years.
Another major move of the Telecom Policy of 1999 was with respect to the restructuring of the state-sector entities operating telecom services. The policy recalled that licensing, policymaking and service-provision functions were vested in a single government authority, i.e. DoT. This needed to change as there was not just a conflict of interest, but the system was such that the government was often influenced to frame policies that were
one-sided and favoured only the state-sector players.
Thus, the Policy of 1999 brought about a significant shift in the governance structure for telecommunications. The Department of Telecommunications (DoT) till then was responsible for both providing telephone services and framing policies that would govern the business of telephony. The 1999 policy split these two functions, stipulating that DoT would be responsible only for framing policy and its functions of running a telephone or related services would be hived off to a different entity. This paved the way for setting up a new state-owned corporation that would take over the functions of running telecom services across the country. The target date for completing the governance structure shift was 2001. To make it abundantly clear that the corporatization move was aimed at ushering in commercial principles in the way these entities functioned, the Policy stated: ‘All the future relationship (competition, resource raising, etc.) of MTNL/Videsh Sanchar Nigam Limited with the corporatized DoT would be based on best commercial principles. The synergy of MTNL, VSNL and the corporatized DoT would be utilised to open up new vistas for operations in other countries.’3
The corporatization and restructuring plan was implemented without much delay or any policy hiccup. By 2000, the Department of Telecommunications Services (DoTS), that used to operate fixed-line and mobile services, was corporatized and it was known as BSNL. The policy functions were performed by the Telecom Commission and DoT. If the restructuring faced no delays or hurdles, it was because all the engineers and employees were allowed to remain part of the Indian Telecom Service cadre and hence their pension claims were protected. This was a tactical bargain that later would hurt the government in its attempts at privatizing BSNL.
Policies as Disruptions
India’s telecom scene changed fundamentally in the five years from 1994 to 1999. The disruptions caused during this period were many, but each of them eventually had a positive impact for sustaining the long-term growth of the telecommunications sector in India. Not all the targets set by the 1994 policy were achieved within the specified timelines. Telephones were neither available on demand by 1997 nor were all villages covered by then.
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