Sat, 04 Feb 2012 19:08:42 GMT

What is 2G? What is 2G scam?

The spectrum allocation scam, which relates to the allotment of electromagnetic waves to mobile phone operators, has proved to be the albatross around the IT and Telecom Ministry’s neck.

The government has been jolted by controversy over licences and radio airwaves that a state auditor says were given out too cheaply, depriving the government of up to $39 billion in revenues.

The telecom minister, A Raja, was forced to resign and Prime Minister Manmohan Singh has been asked to explain himself to the Supreme Court. Opposition parties want a full parliamentary probe and have blocked proceedings until the government relents.

So, what is the controversy all about and what does it mean for the telecom sector and companies?

What is 2G spectrum?

2G is short for second generation wireless telephone technology. Three main benefits of 2G over their predecessors are:

a: phone conservations are digitally encrypted; b: 2G systems are far more efficient on the spectrum allowing for greater mobile phone penetration levels; c: 2G introduces data services for mobiles.

Where was the alleged scam?

In 2008, the country issued 122 new telecom licences and the second-generation radio spectrum bundled with it to several domestic companies that had little or no experience in the telecom sector, and at a price set in 2001.

The state auditor said that the allocation process did not reflect the correct value of radio spectrum as there was no auction and the entire process was flawed, benefiting selected companies. The auditor said that the telecoms ministry did not do the requisite due diligence, granting 85 out of the 122 licences to ineligible applicants.

The auditor also said the ministry did not follow its own guidelines, changed the cut-off date for applications, which gave "unfair advantage" to some companies over others. It said that the entire process "lacked transparency and was undertaken in an arbitrary, unfair and inequitable manner".

The auditor said that several companies deliberately suppressed facts, disclosed incomplete information, submitted fictitious documents and used fraudulent means to get licences and thereby access to spectrum.

Will companies lose licences?

The auditor said that units of Unitech Ltd, which received licences in 2008 and now operates services in a joint venture with Norway's Telenor, had not fulfilled eligibility conditions including required share capital.

Other firms which were ineligible according to the auditor include Loop Telecom, Videocon Telecommunications and S Tel Ltd. The auditor said that Swan Telecom, which has since been partly acquired by the UAE's Etisalat , was given licences even though a unit of No. 2 telecoms firm Reliance Communications held over 10% of equity, a violation of rules.

It is still to early to know whether any licences would be cancelled, but the pressure would be strong not to do so because operators have invested in networks and have subscribers. Any big crackdown could send a wrong signal to investors.

But the government could ask operators to compensate for the potential revenue loss as highlighted by the auditor and may impose fines for not meeting separate rollout obligations.

The auditor also named nine other operators, including market leaders Bharti Airtel , Reliance Comm and Vodafone , who were allotted spectrum beyond the contracted limit without paying any upfront charges, costing the government a potential $8 billion.

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