When is an acquisition not an acquisition? On that question rests the latest twist in the ongoing 2G case, with the Supreme Court's recent finding on the “offloading” of Swan Telecom and Unitech shares turning the spotlight back on the UPA government for its failure to check what was clearly the veiled purchase of spectrum by Etisalat and Telenor.
Finance Ministry and Department of Telecom documents from January 2008 onwards establish the government was aware that the low 2001 entry fee for 2G licences awarded in 2008 would lead to “speculative” transactions by firms seeking to unlock a huge premium on spectrum.
In a meeting on January 30, 2008 — just 20 days after 122 Letters of Intent were granted to various firms — P. Chidambaram, who was Finance Minister at the time, and A. Raja, then Telecom Minister, discussed “getting part of the valuation for Government as premium for spectrum, to avoid hoarding as well as spectrum trading” in case of mergers and acquisitions (M&As) involving spectrum holders. The meeting, which took place a month ahead of either the grant of licences or allocation of spectrum, was also attended by D. Subbarao and S. Behura, Finance and Telecom Secretaries respectively at the time.
An account of the January 30, 2008 meeting was first provided by Dr. Subbarao, who confirmed the existence and details of a four-page “discussion between the Finance Minister and Minister of Communication” to the CBI during his deposition on March 5, 2011.
The document, a copy of which is with The Hindu, shows that Mr. Chidambaram and Mr. Raja had fully anticipated the possibility that some of the licence holders would engage in transactions which “trade in spectrum” purely for profits, and also acknowledged that “premiums” for spectrum would be generated on account of spectrum held by them.
“In view of large number of operators it is expected that some of these companies might have obtained licenses as ‘speculative' venture,” the official discussion paper noted. “Hence, some ‘mergers and acquisitions (M&As)' are likely to take place after some time which de facto, would amount to spectrum trading, as large part of such companies valuation may be on account of spectrum held by them. This spectrum trading is not desirable and needs to be regulated.”
“Beside the general conditions in service license, ... the other guidelines for M&As, clear… and detailed ‘Guidelines' need to be evolved and announced regarding M&As, especially the amount of spectrum which the merged entity would be allowed to retain along with the criteria and other details in this regard, companies valuation by consultants, valuers, appointed by Govt's approval/consent/concurrence; and then payment of a part of the valuation to the Government as premium for spectrum, etc”. [Emphasis added].
With the Central Bureau of Investigation alleging — and the Supreme Court concurring — that the high prices Etisalat and Telenor paid to acquire stakes in Swan and Unitech were on account of the spectrum held by them, the Finance Ministry's silence in the face of transactions it appears to have anticipated has fuelled the litigiousness of Mr. Chidambaram's critics. His alleged role in the 2G matter was examined by the special CBI court which ruled earlier this month that the former Finance Minister could not be treated as a “co-accused.” But both the Centre for Public Interest Litigation and Janata Party leader Subramanian Swamy have cited the go-ahead…Mr. Chidambaram gave for Swan and Unitech in 2008, as well as other decisions he allegedly took on pricing, as grounds for criminal investigation and have taken the matter on appeal to the Supreme Court.
Asked by The Hindu why the Swan and Unitech transactions — in which the two firms offloaded 45% and 60% of their stake to Etisalat and Telenor — were not finally subjected to the government's share of the premium as had apparently been envisaged in the January 30, 2008 discussions, Mr. Chidambaram said in an emailed reply that these were neither mergers nor acquisitions. “Merger and Acquisition (M&A) policy is relevant when two companies merge with each other (merger) or one company acquires another company (acquisition). In the cases of Swan–Etisalat and Unitech-Telenor, the Indian company issued new shares to the foreign investor. These cases were governed by the FDI policy. I have already clarified that these two cases of FDI fell under the ‘automatic route' and no permission was required and no permission was given by the Ministry of Finance.”
Mr. Chidambaram, who is now Union Home Minister, added that Swan and Unitech were not the only companies that issued new shares. “I gather that several telecom companies issued new shares to foreign/Indian investors in the past.” He also noted that the minutes of the January 30, 2008 meeting “simply record that certain aspects ‘need to be studied further' and one among them was ‘merger and acquisition'.”
Four years on from those discussions in 2008, the government is yet to unveil any policy on how its share from transactions that involve the offloading of shares and spectrum trade is to be secured.
The Competition Act 2002, a statute which specifically deals with M&As, describes ‘acquisition' unambiguously. In Section 2, it says ‘acquisition' means “directly or indirectly, acquiring or agreeing to acquire shares, voting rights or assets of any enterprise.” By this definition, at least, the Swan and Unitech transactions would appear to qualify. Not only did Etisalat and Telenor acquire shares in the two telecom companies, but also voting rights proportionate to their holdings. Ironically, Swan and Unitech's own description of their transactions as well as a government press release of October 31, 2008 admits that “assets” were very much a part of the valuation.
Even if the “offloading of shares” by Swan and Unitech was seen as falling outside the strict definition of a merger or acquisition, the government's critics say it is surprising that the huge profits this generated for the promoters through the sale of spectrum by proxy could have escaped the attention of a government that had already flagged this as a potential problem.
The issue figured in Mr. Behura's ‘Approach Paper' written eight days after the January 30, 2008 meeting, and again, in the Finance Ministry's 8-page internal note marked ‘confidential' three days later, on February 11, 2008, which says: “Since spectrum has not been auctioned but priced heuristically, it is likely that the rent, if any, involved in the price of spectrum will form part of the M&A transaction.” The note goes on to discuss how such transactions should be valued and the government's premium out of the M&A activity secured.
The Swan-Etisalat and Unitech-Telenor deals followed on September 23 and October 29, 2008 respectively. They triggered an outcry in the media, which linked the massive valuations and, thereby, the windfall profits for the Indian promoters of both firms, to the premium emerging out of spectrum trading. The correlation was fairly obvious considering that at the time of these transactions, neither company had access to spectrum in all circles, any active infrastructure, customers or revenue stream.
On November 5, 2008, a note was written for the Telecom Commission which is in the possession of The Hindu, drafted by Mr. Raja himself, referring to the media coverage and his meeting with the Prime Minister and Mr. Chidambaram. “Since some of the misleading articles, either out of lack of knowledge or vested motivations, are written in the media about the issuance of new licenses and spectrum allocation more specifically in the case of M/s Swan Telecom and M/s Unitech Telecom as these companies allegedly got unlawful enrichment, the matter was discussed with the Hon'ble Prime Minister and Hon'ble Finance Minister, as I observed in a press conference at Chennai.
“In the meeting Hon'ble Finance Minister clarified that dilution of shares for attraction of foreign investment for business expansion did not amount to sale of license and as such these companies did their share dilution as per corporate laws.
“Nevertheless, I suggest that in order to remove suspicious clouds in the minds of media and people, Telecom Commission may deliberate this issue to restrict outright sale of licences and selling of stakes by promoters to 2nd party for money”.
In one swift stroke, fortified by the “clarification” he had received in his meeting with the Finance Minister and the Prime Minister, Mr. Raja allowed Swan and Unitech safe passage into huge profits while pretending that future windfall gains would be disallowed.
On November 7, 2008, Mr. Raja defended the Unitech and Swan transactions in a detailed press release, arguing that the “question of windfall gain or for that matter any gain for the promoters does not arise” and that the valuations were ‘post money' — reflecting the value of funds applied to the business and not the value of the licence or spectrum. The release further confirmed that “This matter has been discussed and clarified with the Finance Minister.”
Shifting the onus to the DoT, Mr. Chidambaram, in his emailed response to The Hindu, said the entire M&A issue was to have been decided by the TRAI and that questions on the matter were best referred to the DoT.
But given the revenue implication of spectrum transfer charges arising out of M&As, the Finance Ministry itself had told the DoT in 2008 that North Block's endorsement was needed regardless of the TRAI's recommendations. Indeed, a ‘Brief for Finance Minister' dated May 28, 2008, underscores the Finance Ministry's role in this matter. Unwilling to let this remain an issue between the DoT and the TRAI, the note lists ‘spectrum transfer charge' under the section “Issues relating to M&As.” After citing the DoT's M&A guidelines of April 2008, it emphasises: “DoT may be advised that fixation of spectrum transfer charges shall be in consultation with the DEA (Finance Ministry).”
In effect, despite a clear understanding in government that such transactions involving spectrum were ‘speculative' and ‘rent seeking,' amounted to ‘spectrum trading', needed to be valued and deserved to be charged the government's share of premium, this was never done.
Lawyers may continue to argue over whether the Swan and Unitech transactions were “acquisitions” or not. But with the Supreme Court describing the transactions as the “offloading of shares” which enabled the companies to make “huge profits” and the CBI, as well as the CBI Special Judge also stating that the “two companies obtained pecuniary advantage to the tune of Rs.7,105 crore by offloading their shares…,” the question why the revenue-protecting foresight and duty which was so evident in that crucial January 30, 2008 meeting was never put to good use by the Finance Ministry is unlikely to go away soon.