When Reliance Communications suddenly switched off its unviable rural telephony operations, the telecom bureaucracy was not amused. They proposed a hefty fine, but Sibal used different provisions under the USOF agreement to reduce the fines.

The arrival of Kapil Sibal in the Communications Ministry has saved Anil Ambani's Reliance Communications (RCom) a huge sum of money payable as penalty.

Sibal has whittled down the penalty of Rs 50 crore per circle proposed by the administrator of the Universal Service Obligation Fund (USOF) to a few lakhs for violating its contract to provide mobile services in rural areas.

The USOF is a fund used to subsidise rural telephony. Telecom operators can bid for providing this service, and even ask for subsidies. But RCom bid aggressively for many USOF clusters even without subsidies, and later found them unviable and switched off without the USOF Administrator's permission.

Under an agreement dated 16 May, 2007, RCom had agreed to provide this service from base transceiver stations (BTSs) in 53 clusters (5,118 sites). As on 30 November 2010, RCom and its sister company Reliance Telecom had commissioned 3,205 BTSs.

RCom could have renegotiated its contract and sought a graceful exit, but it chose to act unilaterally by sending a notice dated 7 December, 2010, that it was cutting off services with effect from the previous month (from November 22). The notice said that it was switching of all but 46 BTSs, and even these would be terminated in two or three months, and stop paying power and fuel bills to the infrastructure provider, Bharat Sanchar Nigam Ltd (BSNL).

The official response was hard. In a show-cause notice dated 21 December, 2010, to Devinder Singh, President of RCom -a copy of which was sent to Anil Ambani- the USOF official rejected the arguments put forth by RCom and Reliance Telecom for an abrupt switchoff. "RCL (Reliance Communications) is in clear violation of the licence agreement as well as USOF agreement leading to disruption of continuity of service. Also there is no provision for USP (universal service provider, that is RCom) to unilaterally exit on his own from discharge of its performance obligations and go scot-free without performing."

The show cause notice proposed the maximum fine of Rs 50 crore. (Firstpost assumed that if the same logic were to apply to all the 13 circles in which RCom had USOF agreements, the fine would rise to Rs 650 crore. However, we have now been told that the fine was Rs 50 crore overall).

The rural telecom operations under USOF were shut in 13 circles - Andhra Pradesh, Bihar, Jharkhand, Gujarat, Karnataka, Maharashtra, Madhya Pradesh, Punjab, Rajasthan, Tamil Nadu, Uttar Pradesh (East), Uttarakhand and West Bengal.

Reliance sought six weeks' time to reply to the show cause, but the USOF Administrator was in no mood to give it time unless it switched on the services first.

But this is where Kapil Sibal worked his magic. Despite the fact that it was RCom that had unilaterally switched off its BTSs, he decided to treat RCom's action as a mere "interruption" of service and lowered the penalty.

In doing so, he overruled the 'strong' recommendations of his Director (Telecom), Advisor (Finance), Member (Finance) and Secretary (Telecom). All of them had proposed a penalty of Rs 50 crore on RCom in one circle. But Sibal turned it down, arguing for a 'simple penalty' based on the number of days of service disruption at Rs 500 a day. Thus what could have been an exemplary fine for unilateral breach of contract was turned into a paltry amount of Rs 5.49 crore in 13 circles.

Explaining the reasons for his decision, Sibal cites a 16 February, 2011, letter from RCom saying that "they (RCom) have already switched on the sites in the earliest possible timeframe after mobilising their resources." This letter was not part of any previous communication with the Department of Telecom.

The sequence of events is suggestive:

• On 2 February, 2011, Director (Telecom) signs an internal order proposing a penalty of Rs 50 crore from RCom in one circle.

• By 9 February, everyone up the chain, up to the Telecom Secretary, had signed on the internal order endorsing the Rs 50-crore penalty.

• On 16 February, RCom writes to Kapil Sibal. This letter was not apparently circulated to the rest of the telecom hierarchy - but no independent confirmation was available to Firstpost.

• On 18 February, Sibal springs a surprise by strongly referring to the 16 February letter of RCom and reducing the penalty.

While Sibal may be within his rights to overrule his officers and interpret the law in line with his judgment, RCom's claims that it had switched on all the BTSs it had terminated on 22 November were not verified.

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An RCom spokesperson told Firstpost: "RCom has been in discussions (with USO Fund administrator), both through meetings and written (communication), since 2009. Sites allocated to us in 2007-2008 are not viable due to considerable and undue delay in providing passive infrastructure like tower, power and shelter by BSNL. Pan-India operators' presence improved tele-density in such rural areas since 2008 and consequently market access and addressable segment of rural subscribers was low during 2010-11."

The RCom argument thus is that the BTSs were not viable for various reasons, and also because mobile operators were providing pan-Indian services at a low cost even in rural areas. So there was little market left to service.

However, the issue is not the viability of operations, but unilateral termination of service. An USOF note justifying the Rs 50-crore penalty points this out in no uncertain terms. "Had RCL (RCom) heeded to the direction of USOF to revive the switched off BTSs to restore continuity of services, a graceful exit could have been considered by incorporating an exit provision through an amendment of USOF agreement after approval of an exit policy by competent authority in this regard."

The RCom spokesperson did not address the question on unilateral closure of its rural telephony obligations under USOF. He argued that it was wrong to invoke Section 10.2 of the United Access Service Licence (that is, the main mobile licence, not the USOF agreement clauses) for a penalty of Rs 50 crore. "Neither is it violation of UASL or USO Fund agreements. RCom is not aware of the penalties and hence cannot comment."

Sibal's decision clearly puts the RCom violation in the USOF space, and thus rules out penalties under UASL clauses, which are higher. "This is important, especially when clearly 'in-built' penal provisions exist in the RCom-USOF Agreement, which provides for deduction in subsidy on pro-rata basis as well as Rs 500 a day in the case of prolonged interruption," is the Sibal argument.

But equally the point is that RCom did not opt for subsidies. Which is why the Telecom Secretary and other senior officials maintained in their `internal' order that it was not an "ordinary"disruption or interruption of mobile services in rural areas. "The voluntary and unilateral switch-off/closure/discontinuance/withdrawal of service in backward/underdeveloped rural and remote areas, on commercial considerations under a USOF-supported scheme, that too without any notice to those concerned and without any permission of competent authority or without ensuring continuity of service to subscribers, is a clear violation of USOF and UASL agreements and called for strict penal action."

The story of improving tele-density in specified rural and remote areas began in 2007, when DoT decided to subsidise rural telephony operations. It decided to use the USO Fund to set up telecom stations in remote and inaccessible areas and invite private telecom companies to run these stations.

On 16 May, 2007, RCom and Reliance Telecom signed an agreement with USOF to install and commission about 8,200 Base Transceiver Stations (BTSs) in specified rural areas. BSNL was assigned the job to provide towers, power set-up and shelter for the BTSs in these areas. RCom was supposed to energise and run these stations and generate business for themselves in these areas. The agreement was for 20 years initially with the possibility of lifelong extension.

Since the government of India was investing crores of rupees in setting up infrastructure in specified rural and remote areas, the agreement signed with RCom and Reliance Telecom had no 'exit' clause.

In the absence of any separate licence agreement, the USOF agreement with RCom clearly specified that "the terms and conditions of the BSO (basic service operator) or CMTS (cellular mobile telephone service) or UASL licence agreement, as applicable, shall prevail and shall be binding mutatis mutandis (the necessary changes having been made)."

Till November 2010, RCom had set up 1,607 and Reliance Telecom 1,595 BTSs. The two soon discovered that they would not get the business they had anticipated and went into deep losses. On average, they had 70-80 consumers per BTS, while they were spending Rs 40,000 per month on diesel alone to radiate (i.e.make it capable of receiving signals) each BTS.

That's why they switched off the BTSs without much ado. But the USOF Administrator was not amused. His show cause invoked clause 10.2 of the UASL against RCom for shutting down their telecom operations in USO Fund areas. The disruption of supply wasn't 'accidental'. It was a 'deliberate' and 'unilateral' decision to switch off and shut down the telecom operations. The show-cause demanded an answer from ADAG within 15 days as to why a penalty of Rs 50 crore should be not imposed on them for shutting down telecom operations and why the company should not be blacklisted.

RCom, however, chose not to reply. These were the days when A Raja was Communications Minister and about to be arrested. On 5 January, 2011, RCom sought six weeks' time to reply to the show cause notice. The USOF officials offered to allow six weeks' time provided RCom revived all the switched-off BTSs.

Since there was no reply for a while, the internal order on the show cause file was moving up the chain till it landed at Kapil Sibal's table in February after Raja was jailed. This is when RCom sent a letter directly to Sibal, which he referred to in his note while reducing the penalties proposed. RCom has been levied penalties at the rate of Rs 500 a day for disruption of mobile services.

This is how Kapil Sibal saved Anil Ambani's companies loads of money.

The Kapil Sibal rationale