2G scam: PM smelled something fishy but stayed away, says Arun Shourie

Source: ET

Former telecom minister A Raja's statements in court has opened a new political battlefront, withBJP demanding the resignation of the Prime Minister and P Chidambaram, who was finance minister when the 2G spectrum allocation was made. The telecom minister during the NDA regime, Arun Shourie , has been tracking developments on the 2G trial. In an interview to ET , Shourie discusses what he believes the PM knew, going by the file notings, Raja's defence that he inherited the policy, and other related issues. Excerpts:

Are you inclined to believe Raja's statements that he did everything with FM's and PM's knowledge?

Raja was very clever. He wrote about 18 letters to the PM during the 2G episode. And in each letter, he implicated somebody. For instance in his letter on 7 November, 2008, he says, "kindly recall my meeting with you on 4/11/2008 along with the honourable Finance Minister in connection with3G spectrum auction and one time spectrum charges for 2G. During the discussion, you advised me to meet the press, to explain the policy and rules.

Accordingly, I addressed the issues in the press conference today and explained the related issues including the dilution of shares as explained by the Finance Minister, of Swan and Unitech." The same day he issues a press release, in which he repeats that this issue has been explained by the Finance Minister. "This matter has been discussed and clarified with the Finance Minister," the press release says, in which this portion is in bold!

Then the FM himself has said, yes, the PM asked me to examine this particular matter. He says I examined it, I said it is dilution of equity and it was consistent with policy and procedure. If that is the case, how is it that now, the Enforcement Directorate, which is under the same ministry, has slapped a 7100 crore penalty on Etisalat? For violation of FEMA!

If everything was done as per policy and procedure, then how? It now transpires, according to ED, that Etisalat was given permission to bring in money from UAE. But it, instead, brought in money from an unknown unit in Mauritius. Secondly, on the same day, Syed Salauddin, a close associate of Mr Karunanidhi, brought in 380 crore. He was allowed to bring it in as a domestic investor and he brought the money from UAE. He has also been slapped with a Fema notice. Both things happened in Swan on the same day.

So, is Raja on firm ground?

All these statements these lawyers like Kapil Sibal are making now, saying everything was in order and there was zero gain to the companies, are statements that will be used by these companies to defend themselves in notices. Kapil Sibal is not the lawyer for the PM, he is the lawyer for Raja and the companies.

It is not Raja who is dragging in the PM now. You go back to Sibal's first press conference on this matter. There he said Raja kept the FM and the PM informed at every turn. I had said at that time that this is the sentence that Raja will use. That is exactly what has happened. Now you wait and see. When the Telecom Minister says the companies made no gain, that will be their defence.

The PM had said in Parliament in February that the then FM and Raja had agreed on a formula and this was communicated to him. Raja says the equity dilution inSwan Telecom and Unitech was discussed and cleared with the FM before the PM. FM says the PM wanted to know if it was a case of dilution of equity or divestment. This shows that the matter that has caused the most outrage, that these two companies benefitted from enormous valuation for a license they paid the government very little for, was known to the PM and he did nothing about the policy that allowed these companies to do this.

All this is in the public domain. Priority lists have been changed, the basis of first-come-first-served had been changed, cut off date had been advanced and 500 applicants were reduced for favoured companies. It now turns out from the CBI chargesheet that the license applications of three companies were approved even before the policy was announced.

You mean to say rivals would not have brought it to the attention of TKA Nair (Principal Secretary to the PM) and others in the PMO? Do you mean to say the Intelligence Bureau and CBI and others would not have brought this to their attention? I cannot believe that. Because our system is so structured that the PM and his office gets to know about every sparrow that moves in the government. That I can testify from personal knowledge.

This was all in public domain...

The notings on the file indicate that the PM was quite alarmed at what was happening. These licenses were given on 10 January, 2008. On 11 January, the Principal Secretary notes that the PM desires to take into account the developments concerning the issue of licenses. This means perhaps that he wanted to have a meeting about it. The file is submitted back to the PMO on 15 January. Now see what the Principal Secretary notes.

"Prime Minister wants this informally shared with the department. He does not want a formal communication and wants PMO to be at arms length". Why would he give this instruction to his officers unless he knew that there is murky stuff going on and it is better to stay away. I think he had full knowledge and I think he had deep apprehension that something terrible has happened and his only concern was let's stay away from the filth. That is not what a PM is supposed to do.

You mean, he knew but shied away from taking any action?

This particular sentence, at arms length, very well describes Dr Manmohan Singh's attitude in regard to CWG, defence acquisitions and every other major decision. Weapons purchases are not happening because Mr Antony (Defence Minister) also wants to stay at arms length on every decision. I think this will be an apt title for a book on Dr Singh's tenure as PM - At Arm's Length.

Raja has also said that if the policy was wrong, all former telecom ministers must be jailed.

Raja says that he was following earlier policies but he flouted them. Take first-come-first-served (FCFS): He says I will FCFS. Then he disregards pending applications. If you were following the policy, you should have dealt with them first. Then he says I will have this cut-off date of October 1. After the applications are received, he says no, I will advance deadline to 25 {+t}{+h} September.

Then he changes FCFS. First, it was time and date of application received. And suddenly it becomes time and date of fulfilling the conditions in the letter of intent. Where is LoI? People rushed for it. It says, within 40 minutes, bring a banker's draft of Rs1,650 crore. Companies he favoured already has those drafts from Mumbai and sitting in his office. How could they get it in 40 minutes?

When he could not find adequate spectrum for his favoured companies, he changes the priority list in the Punjab and Maharashtra circles. You show me one single, unique, solitary instance during my period or anybody else's period during NDA when any of this would have happened. So yes, people who do wrong should be in jail and continue to be in jail without bail.

My publicity agent

Thu Mar 24 2011, 00:45 hrs

Another scam . . . Inquiry into disinvestment of VSNL” — the papers proclaim. The announcement has been preceded by stories along similar lines in two magazines, a planned build-up to the announcement.

The government does seem to have surrendered its judgment to a bully. And it will be sorry for it. But I will come to that in a moment. The charge is that as the minister of disinvestment in the NDA government, as part of disinvesting government equity in VSNL in 2002, I “gifted” 774 acres of prime land in four cities to the Tatas.

The facts are the exact opposite.

During due diligence of VSNL, it was discovered that the company had been buying land over the years. Technology had changed. It was now possible to provide the same services with infrastructure spread over significantly less land. VSNL, working with advisors, identified 774 acres of land as “surplus”, in the sense that it would not be needed in the future to provide the services for which VSNL had been constituted

Accordingly, in the agreements governing disinvestment, it was provided that whoever won the bid for the company would not get this land. The company was valued by excluding this land. Indeed, the article in the agreement was framed in such extreme terms that at one stage the potential bidders said that they would not go through with the bids at all. The officer who was handling the disinvestment — one of the strongest officers I had the good fortune to work with, P.K. Basu (now agriculture secretary) — told them to go home, and forget the disinvestment. The article would not be diluted one bit, he told them, disinvestment or no disinvestment.

Eventually, they came round and the disinvestment went through. It was one of the most hotly contested cases. On the one side was Reliance — Dhirubhai Ambani was still alive, and was calling the shots. On the other side were the Tatas. The Tatas won, by a whisker. That outcome firmly established the credibility of the disinvestment process. “Even Dhirubhai Ambani could not find out what was going on in your ministry,” observers told us.

The article that Basu and his colleagues incorporated is worth reading. It is a short one. It could have been accessed by anyone from half a dozen sources — but by now it is no surprise that sections of the media will deliberately not read!

Please read the article, and then I will set out its implications. Here it is:

4.7 LAND

(a) (i) The strategic partner confirms that it shall cause and procure the company to hive off or demerge the land into the resulting company pursuant to a scheme of arrangement in terms of the provisions of Section 391 to 394 of the act.

(ii) The strategic partner confirms its understanding that it will transfer all such shares in the resulting company to the government as it may acquire as a consequence of this transaction, that is a minimum of 25 per cent of the resulting company’s issued equity shares or a higher number which shall include shares in the resulting company that it may further acquire as a consequence of any further sale of the equity shares in the company by the government to the strategic partner, prior to the demerger, as part consideration of transfer of the transaction shares and any subsequent sale of the company’s shares by the government to the strategic partner, pursuant to this transaction.

(b) The strategic partner confirms that:

(i) it shall do and cause to be done all and any such acts, matters, deeds and things as are necessary, usual or expedient including voting in favour of the item of business relating to the approval of the scheme of arrangement to implement the hiving off or demerging of the land into the resulting company;

(ii) it shall not directly or indirectly do or cause to be done any acts, matters, deeds or things which may adversely affect or delay the hiving off or demerging of the land into the resulting company.

(c) (i) If for any reason the company cannot hive off or demerge the land into the resulting company then, subject to Article 5.6 (b) (iv) and (xiv) hereto at any time when the company sells or transfers the land or agrees to sell or transfer or otherwise develop the land, the strategic partner shall pay to the government within seven days of the sale or transfer of the land an amount equivalent of 25 per cent of the benefit accruing to the company pursuant to such sale or transfer or otherwise development of the land, as determined by the appraiser, after taking into account any impact under the Income Tax Act, 1961.

(ii) Subsequent to this agreement and the share purchase agreement, if the government sells more than 25 per cent of its equity shareholding in the company to the strategic partner, then the percentage of amount to be paid to the government by the strategic partner on account of sale or transfer or otherwise development of the land under Article 4.7(c)(i) shall increase in proportion to the percentage of such further sale of equity shareholding in the company by the government to the strategic partner. For the purpose of this article the term “transfer” shall include sale, lease, licence, grant of development rights or the parting of physical possession of the land or transfer of any interest, whatsoever, in the land.

The article provides, first of all, that whoever wins the bid — and there could have been no plan to pass on a favour to the Tatas, etc, for no one knew who would win the keenly contested bidding process — shall not get the surplus land. The excess land would be detached from VSNL. A new company would be formed, and the land would be transferred to it.

Second, that the shareholding of this new company would be what the shareholding of VSNL was before disinvestment. That is, the bidder who won would have no share in it at all. The government would have the proportion that it had before disinvestment — about 52 per cent. Employees would have the proportion they had. The rest — about 47 per cent — would be with the general public that held shares of VSNL, the company was listed in both India and the USA. In a word, a government company would be set up. And this government company would acquire the land.

Third, in case such a company could not be formed and the disinvested VSNL decided to part with the land, it would be able to do so only if the government agreed to the proposal. The reason for this was that, even after disinvestment, the government would continue to hold 26 per cent of VSNL’s equity. The sale of land, or disposal of any rights in an asset such as land, can only be done by a special resolution of the board and that resolution cannot go through unless the party that holds 26 per cent of its equity agrees.

Fourth, if that new company could not be formed for some reason, and if the government approved the proposal of VSNL to sell the land, the entire proceeds would be distributed in accordance with the pattern of shareholding that prevailed before disinvestment — that is, the winner would get absolutely nothing; the proceeds would be divided between government, employees and the general public in the proportions in which they held the shares before disinvestment.

There was a fifth factor which was especially important, as it caused the greatest heartburn among potential bidders. This is contained in clause (c) (ii) reproduced above. This clause provided that if government shed more than 25 per cent of the equity it was holding of VSNL, then the share of the proceeds that the disinvested VSNL and the winning bidder would have to pay to government out of any sale or transfer of land or rights in it would increase proportionately.

Sixth, the hands of the prospective bidders were tied tighter by incorporating a very comprehensive definition of “transfer”. The article had used the term “transfer” of land, etc. In the last sentence, it was provided that “for the purpose of this article the term “transfer” shall include sale, lease, licence, grant of development rights or the parting of physical possession of the land or transfer of any interest, whatsoever, in the land.” All proceeds from any form of transfer would go to the government and the original shareholders and not a penny would go to the successful bidder.

Finally, a series of interlocking clauses tied the prospective winner in perpetuity! Privatisation agreements have “call” and “put” options. That is, after a specified period — say, three years — the winner can “call” on the government to sell its residual shares. Similarly, the government has the right to “put” its shares for sale. But in the VSNL agreement, we provided that even if the government parted with all its shares through either option, it would always retain one share — known as “the golden share”; and that by virtue of this single share, all the rights it had in regard to the surplus land would remain with the government!

In other words, the agreement provided that neither the surplus 774 acres nor any right in them whatsoever shall go the bidder who succeeded in winning the contest. So, where does the minister get this notion, parroted by some magazines, that 774 acres were gifted to the Tatas?

“But why was the land not just taken out of VSNL before disinvestment?” the innocent ask. VSNL was a listed company — it was listed both in India and the US. If such a substantial asset was taken away, any shareholder could have gone to court and halted the whole process on the charge that his interests had been harmed. On the other hand, if it was not taken away, the government would be accused of making “priceless” land over to whoever succeeded in winning the bid. Hence a solution was devised: the land would be taken out of VSNL, but the interests of pre-disinvestment shareholders would not be impaired. The land would be turned over to a new company in which the shareholding pattern would be what it was before the disinvestment of VSNL. That was an excellent solution that Basu and his colleagues devised, and it has stood the test of time. The winner did not get the land. The shareholders did not go to court!

“But didn’t VSNL have enormous amounts of cash? Wasn’t this just handed over to the Tatas?” Yes, VSNL had a cash reserve. The fact is that this cash was drawn down before the company was disinvested. The government had VSNL declare a special dividend of 750 per cent! As a result, the winning bid along with this dividend secured for government a P/E ratio of 11 as against the measly 6 at which VSNL shares were trading before disinvestment.

When no other tack is left, critics are led to ask, “But why has the new company not been set up even though nine years have passed since VSNL was disinvested?” The fact is that the government and the winners — the Tatas in this case — tried to work out a solution. The attempts couldn’t get past disagreements. For instance, the Tatas said that as the land did not belong to them, and as it was to be transferred to a company that would in essence be a government company, the government should pay the stamp duty that would be incurred in such transfer. Similarly, as the monopoly of VSNL in regard to international calls had been curtailed by two years, a compensation package was announced by the government. They felt that this was inadequate. As the issues could not be resolved, they proposed that the matter be referred for arbitration. I had no problem with that proposal, but my colleagues in the ministry correctly counselled that as the proposal had revenue implications, we should send it to the finance ministry. That is what was done.

The government changed. Since then, I see from what has appeared in public that the Tatas kept writing to the government requesting the latter to settle the matter. They wrote that there were three alternatives, and that any one of the three would be acceptable to them. The government — the UPA government, that is — kept saying that it was examining the issues and would get back to them. It did not.

Kapil Sibal says this delay has been very costly to the people of India, and that is why he has ordered an inquiry. I say — “Bravo! Excellent!” He should institute an inquiry into the conduct of ministers whose negligence has cost the country so much.

The ministers? P. Chidambaram and Pranab Mukherjee, the finance ministers of the UPA governments! For, remember, the department of disinvestment has been under the finance ministry since the UPA formed its government in 2004. Maybe they are the real targets of this buccaneer? No?

Why else would Kapil this time round entrust the inquiry not just to a handpicked judge but to a handpicked officer working directly under him?! As for me, far from being my inquisitor, Sibal is my publicity agent! He keeps me in the news. And gratis!

The writer was Union minister for telecom and for disinvestment in the NDA government