Telecom's Black Swan

[ravi_patent 28]

sunil jain of BS has been writing on indian telecom scenario in hard hitting style gibng greater insights into the matters we usually discuss here.

http://www.business-standard.com/india/new...n/00/11/343219/

Did Anil Dhirubhai Ambani’s (ADA) Reliance Communications own Swan Telecom at the time Swan applied for a GSM mobile phone licence? This question has assumed centrestage with some MPs writing to the Prime Minister who has, in turn, asked the telecom ministry to look into the matter. If Reliance Communications or other Reliance ADA Group firms owned more than 10 per cent of Swan Telecom when the latter applied for a (GSM-based) mobile telephone licence in March 2007, this was against the law which said no shareholder can hold more than 10 per cent of the equity in two telecom firms in the same licence area — Reliance Communications already operates a CDMA-mobile phone service. In which case, Swan’s licence — Swan is one of the firms which got a licence at bargain-basement prices thanks to telecom minister A Raja — could well come under a cloud, as will the deal Swan entered into with Dubai-based Etisalat to sell part of its equity at a huge premium.

Also under the scanner is how the state-owned BSNL entered into a roaming agreement with Swan — BSNL does not have such an arrangement with any private telecom firm, so why did it sign up with a firm which doesn’t even have one subscriber? Since this means Swan can offer mobile phone services across the country without having much of its own network, the deal is a winner for it; it offers little to BSNL since Swan’s subscribers will be minuscule for a long time to come.

The Reliance Communications’ story is an interesting one. And the company’s explanation for the events is so beyond the realm of normal expectations, it can only be classified as a Black Swan event, to use Nassim Taleb’s classification — an event so rare, it happens once in a millennium.

In March last year, when Swan applied for a GSM mobile licence, Reliance Telecom (a Reliance ADA subsidiary) owned 9.9 per cent of it — this was permissible within the law. The rest was owned by Tiger Traders. The problem, however, was that Tiger’s directors were Reliance ADA Group employees and their address was also that of a Reliance ADA Group firm. Also, Reliance Communications’ annual report showed the firm had, in 2007, given Swan Rs 992 crore by way of 99.2 lakh 8 per cent redeemable preference shares with a coupon value of one rupee — that is, Reliance subscribed to these at a premium of Rs 999 each. In other words, everything about Swan smelt Reliance Communications at this point in time.

Reliance ADA, for the record, has a different explanation for things, an explanation that is also quite worrying. According to Reliance ADA, a very large group of builders (Dynamix Balwas own the Meridien Hotel in Mumbai and the Hyatt in Goa) approached it to say there was a possibility of getting a telecom licence; but since the builders had no telecom experience, it was decided Reliance ADA employees would be directors of Swan, the firm chosen to apply for the spectrum. According to Reliance ADA, since it was in the telecom business and felt it could do business with Swan if it got a licence (Swan could, for instance, rent out its telecom towers), it didn’t mind doing this.

Presumably, this is also why it put in Rs 992 crore with Swan. According to Reliance ADA, redeemable preference shares are not equity but are debt — so it never owned more than 9.9 per cent of Swan’s share at any point in time. (In India, by the way, redeemable preference shares are considered as equity, though under the International Financial Reporting Standards they are considered as debt.) Reliance ADA adds that its directors stepped down from Swan on October 10 — that is, long before Swan got its licence in January 2008 and a few days before Raja took his decision to award Reliance Communications’ GSM spectrum under the dual-technology umbrella on October 18, 2007. Talk about timing! Swan also returned Reliance Communications’ money before it got the licence.

This explanation of Reliance ADA’s dealings, of course, is what the telecom ministry has to examine. It is, of course, curious that the ADA Group should be willing to put so much money into a firm that had little to offer by way of collateral. And since the 8 per cent return Swan was offering by way of interest on the preference shares could only be on the Re 1 coupon value (Reliance Communications paid Rs 1,000 for each share), in effect, it virtually gave the money to Swan for free. And, when the Reliance ADA directors stepped down and Swan gave it its money back, Reliance Communications didn’t get any premium either.

Whether the help Anil Ambani and A Raja extended to Swan was a black swan event or something else is what needs to be established.

Edited December 15, 2008 by ravi_patent

[situ1962 21]

This is another instance of reliance people blatantly trying to twist the laws to suit them.time and again they have been doing this.they can go to any extent to get things done.

[KumaarShah 143]

They can try every possible way to subvert rules and do things they want. But if we ask them to open up their networks by allowing foreign handsets, they refuse. Not the similarities here. They can do whatever they want, but if someone tries to do the same to them, it is hara-kiri.

Wish they get caught on this one and get punished also.

[ravi_patent 28]

dear kumar you are correct..at the same time gsm lobby is equals ADAG .guess who is fighting tooth and nail from revising the call termonation charges.infact COAI is even saying that the same shall be upwardly revised.The root of the problem lies in the system ..unless the change happens there we will hear this kind of stories again and again

Edited December 15, 2008 by ravi_patent

[Saurav 22]

Reliance has a long history of "BACK DOOR ENTRY". Be it Telecom, Petroleum or anything.

[Honest 836]

^^^

Very correct my dear Saurav, Reliance love these tactics.

[Harshal 11]

Well the same should also go for the Unitech license. Look at the mockery they have created out of the bidding process. The license they got for 1600Cr is now worth 10K+ cr. Who knew? Except of course A Raja and his now deeply filled pockets.

[Honest 836]

Govt seeks reply from WPC, BSNL

Economic Times l 17 Dec l New Delhi

The communications ministry has asked its Wireless Planning and Coordination (WPC) wing as well as state-owned BSNL to submit their replies over allegations that they had favoured Swan Telecom, a new entrant that was granted telecom licences earlier this year.

The move comes after the Prime Minister’s Office had asked DoT to look into these allegations following complaints from a member of parliament. In fact, many of the existing operators have also alleged that there were several irregularities with regard to the allocation of spectrum to Swan.

The department has asked BSNL to provide details of its roaming agreement with Swan Telecom. As per the deal, Swan Telecom can use the state-owned telco’s networks on a national basis for offering mobile services. However, existing operators as well as members of parliament have questioned as to how BSNL, which so far has refused to open its networks to other players, entered into a deal with a new entrant who did not even have a single subscriber.

“BSNL, which has never done any roaming agreement with any operator, was forced to do a roaming agreement with Swan Telecom. The same favour was not extended to any other operator. I am told that the policy was made by BSNL only to suit Swan Telecom,” Rajya Sabha MP Dharam Pal Sabharwal said in his communication to the prime minister.

The department has also asked the WPC to explain if two of its officials - R J S Kushwaha and D Jha were transferred over the issue of spectrum allocation to Swan Telecom. It is alleged that these officials were transferred as they did not allot spectrum to Swan Telecom.

[Honest 836]

BSNL's MoU with Swan aims at exploring revenue streams: Goyal

Press Trust of India l 18 Dec l New Delhi

Faced with the accusation of favouring a new operator Swan Telecom to provide roaming agreement, state-run BSNL has told the government that it is purely a business decision for revenue earning and non-exclusive in nature.

"We have replied to Department of Telecom that we have an MoU not an agreement with Swan Telecom for intra-circle roaming arrangement. The MoU is very clear that if at all we have spare capacity available, then only we will carry their calls.

"As of now nothing is final on sharing and we are open to give the services to others as well if the trial with Swan works out it is a pure business case to explore more revenues," Bharat Sanchar Nigam Limited Chairman and Managing Director Kuldeep Goyal said.

"It is only to get additional revenue it can be done with other telcos as well, there is no exclusive arrangement with Swan on this", he elaborated.

Recently a member of Parliament wrote to the Prime Minister over this, saying BSNL has never done any roaming agreement with any operator, but entered into one with Swan Telecom.

Subsequently, the communications ministry asked BSNL to submit their replies over this allegation if it had favoured Swan Telecom, a new entrant that was granted telecom licences earlier this year.

Unlisted BSNL is under pressure to retain its falling marketshare and revenues from a competitive market where call rates are as low as 20 paise.