2G scam: Time to stop portraying Vinod Rai as the villain when politicians are to blame

Inclusive Governance: Enabling Capability, Disabling Resistance

Vivek Kaul

In a blog on The Economic Times website TK Arun writes that “Former CAG[Comptroller and Auditor General] Vinod Rai does a far better job of drumming up publicity for his book than he did of auditing the government’s accounts.”
This is a very serious charge and needs to explored in detail. Arun further writes that “The New Telecom Policy identified, in 1999, the goal as maximizing the spread of telecom, so as to accelerate the pace of social and economic development.” True.
But there are certain details that one needs to look into.
The National Telecom Policy of 1999 had set a teledensity target of providing 15 telephone connections per 100 of population. The teledensity in 2001 had stood at 3.58. In September 2007, a teledensity of 18.22 had been reached.
It was only in September 2007 that the shenanigans of the then communications minister A Raja started. In a press release put out by o
n September 25, 2007, applications were invited for telecom licenses. The last date was set to October 1, 2007, a week later. In total 575 applications for 22 service areas were received by the communications ministry.
There wasn’t enough telecom spectrum available to allocate to so many applicants. So what was the way out? In fact, the tenth plan document clearly mentions this, when it comes to spectrum allocation: “pricing needs to be based on relative demand and supply over space and time in a dynamic manner, [with] opportunity cost to reflect relative scarcity of the resource in a given situation.”
So yes, the goal of the National Telecom Policy of 1999 was to maximize the spread of telecom, but there were other factors to consider as well. Interestingly, Manmohan Singh wrote a letter to A Raja on November 2, 2007. In this letter Singh said “In order that spectrum use efficiently gets directly linked with the correct pricing of spectrum, consider (i) introduction of a transparent methodology of auction, wherever legally and technically feasible, and (ii) revision of entry fee, which is currently benchmarked on old spectrum auction figures.”
The telecom licenses were to be given away by following the first-come-first-served process, with an entry fee being charged. An entry fee of Rs 1,651 crore, set in 2001 was being charged. The Indian telecom sector had totally changed in the meanwhile. As mentioned earlier the teledensity in 2007 was at 18.22 per 100 of population, having exploded from 2001 onward when it was at 3.58.
Taking these factors into account, the telecom regulator
TRAI had also pointed out in August 2007 that “In today’s dynamism and unprecedented growth of telecom sector, the entry fee determined in 2001 is also not the realistic price of obtaining a license. Perhaps it needs to be reassessed by a market mechanism.”
As Rai points out in his book
Not Just An Accountant—The Diary of the Nation’s Conscience Keeper: “It is obviously no one’s case that we need to sit back once a target is achieved, but surely revenue mobilization, in lieu of a scarce national resource being made available for private commercial exploitation where tariff is not fixed, cannot be totally overlooked.” If nothing else, at least the rate of inflation had to be taken into account while charging an entry fee.
The National Telecom Policy of 1999 aimed at maximizing teledensity, nevertheless there were certain ifs and buts built into it. As Manmohan Singh pointed out to Raja in the letter cited earlier: “The DoT [department of telecom] has received a large number of applications for new licenses in various telecom circles. Since spectrum is very limited, even in the next several years all these new licensees may never be able to get spectrum. The Telecom Policy that had been approved by the Union Cabinet in 1999 specifically stated that new licenses would be given subject to availability of spectrum.”
So, it wasn’t just about maximizing the spread of telecom, as Arun wants us to believe. Other practical issues needed to be considered as well.
Arun further goes on to write “
As for Rai’s criticism of Manmohan Singh, it would be fair to ask: has he estimated the cost that would have been inflicted on the nation by the political turmoil and uncertainty caused by the then-PM refusing to yield to coalition compulsions?”
This argument doesn’t make any sense to me. It has been well established by now that Manmohan Singh was aware of what Raja was up to, but chose not to do anything about it, after writing a couple of letters to Raja. Singh responded on November 21, 2007, by sending what former CAG Rai calls a “template response”. In this letter Singh acknowledged that he had received Raja’s recent letter on the recent developments in the telecom sector. Raja wrote to the prime minister again on December 26, 2007. Singh again responded with the same templated response on January 3,2008.
Raja had dismissed Singh’s suggestion of considering an auction. And Singh had not done anything about it. In fact, he went on to distance himself from the decisions being made by Raja. Joint secretary Vini Mahajan recorded that the prime minister “does not want a formal communication and wants PMO to be at arm’s length.” As Rai asks “How can the office of the prime minister distance itself from such major decisions? Arm’s length from the action of his own government?”
The straightforward answer here that Singh was just trying to run a coalition government. But as
Rai put it in a recent interview to Outlook “Does good politics mean just staying in power? Integrity is not just financial; it is intellectual integrity; it is professional integrity. You have an oath of allegiance to the constitution and that is important.”
Hence, what is clear here is that Singh was more interested in continuing to be PM rather than making what he thought was the right decision.
Arun further writes ” In estimating a notional loss to the exchequer of Rs 1,76,000 crore from not holding auctions to allocate 2G spectrum, Rai erred on multiple counts.”
The CAG report on the 2G scam had four computations of the loss to the country. These numbers were Rs 67,364 crore, Rs 1,76,645 crore, Rs 69,626 crore and Rs 57,666 crore. The CAG did not put out only one estimate. The media of which Arun is a part of picked up the highest number and splashed it all over. That was clearly not Rai’s fault.
On February 2, 2012, the Supreme Court cancelled all the licenses that had been issued by A Raja. These licenses had to be auctioned again. The two rounds of auctions that happened netted the government Rs 78,505 crore. This number is more than the three out of the four options of losses that the CAG calculated.
As T N Ninan wrote in the Business Standard “As it happens, the CAG has more than one figure of revenue loss. Several commentators have also come up with numbers, which run into tens of thousands of crores. And because of the aberrant manner in which Mr Raja handed out these substantial gifts, it became the largest scam in our history.”
Arun further writes “[Rai] failed to take into account the additional revenues the government earned from allocating spectrum in the manner in which it did, instead of holding auctions.”
This is a basically using the end to justify the means and in the process advocating crony capitalism as well. When the press release inviting applications for telecom licenses was put out, the potential applicants were asked to apply between September 25, 2007 and October 1,2007. In a letter written to Manmohan Singh on November 2, 2007, Raja had informed him that he had decided to advance the cut off date for licenses to September 25,2007, the date on which the press release was issued for the allocation of licenses, instead of October 1, 2007.
Raja did not offer any reasons for the same. Singh did not ask. What is interesting nonetheless is that
thirteen applicants seemed to have known of this change in date, in advance. How else do you explain the fact that certain applicants appeared with demand drafts amounting to thousands of crore, which had been issued even before the press release inviting applications for telecom licenses was put out on September 25, 2007.
Given these reasons, I guess its time that certain sections of the media stop portraying Rai as the villain of the piece. The real villains were the politicians starting with Manmohan Singh who let A Raja to carry out the 2G scam. As Rai writes “The MPs tore into the CAG’s findings. Congress MPs walked up to me…and said ‘We have to ensure that the prime minister’s name does not get dragged into this,’ adding, ‘What you people presented appears so reasonable, but what do we do?’ Such are the ways of parliamentary democracy practised by some.”
To conclude, as far as Rai drumming up publicity for his book is concerned, what is wrong with that? It’s a book that needs to be read by every thinking Indian who wants to “really” understand how the politicians of UPA took India for a ride, over a period of ten years.
The article originally appeared on www.FirstBiz.com on Sep 19,2014
(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)

Arindam Chaudhuri's business model is similar to other private institutes

Vivek Kaul

Today’s edition of The Economic Times has a very interesting story on the IIPM bossman Arindam C
haudhuri. Chaudhuri sits at the top of an empire of four companies which in 2010-2011 generated revenues of Rs 533 crore, on which there was an overall loss of Rs 5 lakh (but not all the companies were loss making) and an income tax of just Rs 5 crore was paid.
This is typically how most private education institutes in this country tend to operate. While there revenues are decently high, they typically tend to make a loss and pay very low income tax. And there is a clear method to the way they operate.
The money spinning machine at the heart of any education empire is the education institute where students come to study. The same is true in case of Chaudhuri. The education business remains a major revenue earner within the group. In 2010-2011 its total revenues stood at Rs 349 crore. On this it made a loss of Rs 2.3 crore.
Typically in most such cases the education institute doesn’t own any assets. To give you a simple example, the building in which the education institute operates out of might be owned by a private limited company. The private limited company will be in turned owned by the entrepreneur who also runs the education institute. Hence, the rent that is paid by the education institute is legally tunneled out and goes into the pocket of the entrepreneur.
The Economic Times points out “For example, in 2010-11, the education arm paid Rs 37.6 crore to the consulting arm, Planman Consulting—Rs 31 crore for services received and Rs 6.6 crore as rent.” While it is not specified what this rent was for, it was a rent nonetheless. Planman Consulting is the consulting company of Arindam Chaudhuri. What is interesting is that the education arm was responsible for 84% of the total revenues of Rs 45.8 crore revenues earned by Planman. The company also earned a profit of Rs 7.8 crore whereas the education business made losses.
There are other legal ways of tunneling out money. The computers and other infrastructure in the education institute might also not be owned by the institute and may be on rent from a private limited company owned by the entrepreneur or by one of his close relatives. Or if the institute does own the computers, it buys them from a company owned by the entrepreneur.
Similarly insurance contracts that the education institute might enter into are also facilitated through an insurance broker close to the entrepreneur. Another legal way of tunneling out money is through advertisements. The advertisements that are placed in the media are done through an advertising agency owned by the entrepreneur or one of his relatives. The agency gets a cut on this.
Chaudhuri though has taken this trick to the next level by launching his own magazines and placing his own advertisements in them. As
 The Economic Times points out “The latest issue of The Sunday Indian had 44 edit pages and 19 ad pages (including 10 pages of group ads)….In 2008-09, the latest year for which financials were available for Planman Media, it earned revenues of Rs 41.4 crore. Of this, just Rs 1.6 crore came from magazine sales.” Interestingly claims are made that Chaudhuri’s magazines sell more than magazines like India Today and Outlook in the general segment and more than any other business magazine, in the business segment. So then why is Planman Media earning only Rs 1.6 crore through magazine sales? Also if magazine sales is not bringing in the moolah for Planman Media, what is? Advertisements from other group companies owned by Chaudhuri?
So moral of the story is this. Whenever the education institute spends money on anything there is a private limited company owned by the entrepreneur waiting to capture it. In fact, entrepreneurs further tunnel out money even from these private limited companies by giving themselves high salaries.
Chaudhuri is no exception to this. As The Economic Times points out “Chaudhuri and his wife, Rajita, who are executive directors in Planman Consulting, drew a total remuneration of Rs 6.96 crore from the company that year.” So Chaudhuri and his wife took away more than 15% of the Rs 45.8 crore revenue of Planman Consulting as a remuneration.
Entrepreneurs have other innovative ways of tunneling out money. They set up placement agencies. And these agencies get paid for placing students as well as appointing teachers at the education institute. Interestingly, some of the biggest private business schools in the country (including IIPM) tend to place their ‘unplaced’ students in one of the group companies. The idea is of course to show decent placements. Other than that it gives these students a little more time to find themselves a decent job. And once they do that on their own, the institute can always claim that they were placed by the institute.
Of course, if the student is unable to find a new job within a certain time period, he or she is asked to leave, given that by then a new batch of students is ready to be placed. The institutes can afford to do this because of the high fees that they charge for their courses. If some of it goes back to the student, it does not do them much harm. Its all a part of the game.
To get back to the main story, the question is why do education institutes do this? As The Economic Times points out “An accounting expert, speaking on the condition of anonymity, says it’s a common industry practice for the education arm to show losses and group companies that provide services to this company to earn profits. “Promoters adopt this to circumvent Indian regulation, which prohibits profitmaking companies in the education sector,” he says. “But firms that provide services to the company that runs the education business are not bound by it.”
This essentially ensures that the education entrepreneur surrounds the institute with a web of private limited companies and uses them legally to tunnel out the revenue being generated out of the fees that students pay the institute. Of course, everyone does not operate at the same scale and is not as successful as Arindam Chaudhuri is.
There is a scope for great debate here. Why cannot education be a profitable business? This specially in a country where education is in such a short supply. Ironically, private equity investors have been greater investors in coaching institutes which coach students to get into education institutes or sit for various board exams. But given that the education institutes are not supposed to be profitable in a normal way, these investors have stayed away.
And entrepreneurs who have entered the education business are more interested in making a quick buck, rather than building an infrastructure which provides quality education at a decent price over a long period of time. Typically big private money has stayed away from this sector. Those who have entered it are typically politicians, who are good at financial shenanigans and are looking to put their black money to some use.

The article originally appeared on www.firstpost.com on March 15,2013

(Vivek Kaul is a writer. He tweets @kaul_vivek. He studied in a private business school. And also worked for one)