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Telecom scandal shakes India’s most beloved industry

Within the leafy, trash-strewn Patiala Court complex in central New Delhi, a telecommunications scandal that stretches into the uppermost echelons of political and corporate power in India is reaching a sort of apex.

There are 22 television trucks parked outside the front gates while, inside, the tiny courtroom strains under the crush of more than 30 lawyers, a horde of khaki-clad police officers and dozens of journalists. The mass stirs as M.K. Kanimozhi, the daughter of Tamil Nadu's chief minister and a member of Parliament from that southern Indian state, strolls into the room in a lime green sari. Her lawyer's opening statement that May afternoon attempts to deflect allegations she's involved with a TV executive in a multimillion-dollar slush fund. It is interrupted when a lawyer faints from the heat, crumpling to the floor, prompting more chaos.

Ms. Kanimozhi's bail is later denied, and she is sent off to Delhi's Tihar jail – where she remains, three months later, the latest of India's formerly invincible upper crust to succumb to justice in a country that has long been inured to corruption. The day before, five mid-level telecom executives sat in the same courtroom. Outside, a defence lawyer for one of the executives leans against a wall. "The real people who did this, the big people, are not being charged. The bigger issue is why Anil Ambani and Ratan Tata are not an accused," he says, speaking of two India's most well known business leaders. Gesturing inside, he adds: "These are the scapegoats."

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Before, it would be absurd for any Indian to suggest that billionaire tycoons be prosecuted. But this ongoing trial, over the sale of wireless licences in 2008, has triggered a bout of soul-searching in India, where shifting demographics and a growing middle class are changing how citizens view corrupt politicians and bribes. The crisis and protests currently gripping India's government – led by anti-corruption campaigner Anna Hazare, who is publicly undertaking a "fast unto death" – was partly prompted by the staggering sums involved: Estimates of loss to India's exchequer range as high as $40-billion (U.S.), making it the biggest corruption case in India's history.

It also represents a breathtaking fall from grace for India's showcase industry. Telecoms here add as many as 20 million subscribers per month, making it the fastest growing wireless sector in the world. That growth comes at a cost, however: Prices are under constant pressure in the hyper-competitive market, and telecoms are plagued with extensive theft, growing red tape, and policy makers who increasingly favour home-grown companies over foreign imports. Vodafone Group Plc, one of the world's biggest wireless companies, is currently struggling to fend off the government's attempt to reclaim what it says are $5-billion in unpaid taxes.

The difficulty even global giants have in India speaks to the risks all companies face in emerging economies, where the allure of volume, and a positive story to tell in Western boardrooms, often glosses over the reality of market conditions.

The scandal over the wireless sale began on Jan. 10, 2008, when a couple of dispirited government officials visited the office of Subramanian Swamy, a former politician and Harvard professor, with startling information.

Telecom ministry bureaucrats had sent out a notice at 2:45 p.m. that afternoon, asking companies interested in purchasing wireless licences, worth hundreds of millions of dollars each, to be present at the ministry with bank drafts a mere 45 minutes later – a feat impossible for even the most plugged-in executive.

Mr. Swamy, who has twice served as a government minister, says representatives from the companies that won licences were already waiting in the antechamber of the telecom minister – Andimuthu Raja, who remains in jail during the ongoing trial – with bank drafts pre-dating that afternoon's release. "The remaining people who wanted to storm in, they used bouncers to get rid of them," Mr. Swamy says, in a basement office below his residence in New Delhi.

Soon after, he says, the telecom minister made a series of personal purchases that included six Mercedes. "Mr. Raja, who came from a very poor family, from a very poor part of Tamil Nadu – suddenly I saw him looking jazzy," Mr. Swamy says. "I knew something had happened."

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That something, prosecutors allege, was a first-come-first-served sale arranged via million-dollar bribes, and not an above-board government auction.

After Swan Telecom – one of the companies that purchased licences that day for $340-million (U.S.) – sold a 45-per-cent stake to Dubai-based telecom carrier Etisalat for $900-million, a government auditor ruled Swan was a front company for Mr. Ambani, the billionaire, who already owned the domestic wireless giant Reliance. Other companies made similar returns: Real estate giant Unitech sold to Norway's Telenor; Loop Mobile sold to Essar, which has a one-third stake in Vodafone's India business unit, later bought out entirely by Vodafone; and Tata Teleservices, part of Ratan Tata's conglomerate, sold a lucrative stake to Japanese telecom giant Docomo.

The loss to India's exchequer was revealed when the next round of licences were sold at a much higher price. While many calculate that loss at around $40-billion, some say it's as low as a few billion, while others contend it's impossible to compare the two sales. Whatever the ultimate cost, the country's telecom industry is now wobbling with incredible uncertainty.

Tucked behind lush country clubs in the central Indian city of Hyderabad, the architect of India's present-day telecom sector, Tripuraneni Hanuman Chowdary, is sitting beneath trees in his courtyard, meeting with his neighbourhood council.

The 79-year-old Mr. Chowdary was hand-picked by the Prime Minister in the late nineties to become part of a committee designed to tackle India's sprawling phone monopolies. "We used that [committee] to demolish every vestige of monopoly in India," Mr. Chowdary says. At the time, the country's telecom industry was a mess: The wait to get a phone stretched for years, the market was served only by state-owned monopolies, and connectivity remained a plaything for India's elite. Now, as the rural poor flock to cellphones, the number of mobile users has soared to more than 500 million in only a few years.

To illustrate that growth, Mr. Chowdary calls to one of his domestic labourers, and a woman shuffles in from sweeping another room. She stands, blushing, holding a mobile phone that is held together with tape. "Her family is 300 kilometres away. She has got a telephone, see? She talks every day – at least for 20 minutes a day … Her family is in a village. She collects money and sends it for support," Mr. Chowdary says. "This is a revolution."

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But like many revolutions, he thinks this one veered off course. Mr. Chowdary blames the current government for the mess, saying the auction process for new licences was "totally corrupt."

In a boardroom inside Vodafone Essar's Mumbai headquarters, Samresh Parida, the company's strategy director for India, is talking about "caller tunes," the cellphone feature that allows customers to have a song play when people call them – or up-to-date cricket scores.

How much does Vodafone charge for this service? "It's a small number," Mr. Parida says. "But, you know, when millions of people use it, it's not small."

Like many opportunities in emerging markets, this industry revolves around volume: The sheer growth in subscribers makes up for the difficulties of operating on the subcontinent. From lawless jungle conflicts to the constant theft of cellphone tower equipment, it's not easy running a business here. Even worse, prices have dropped between 35 and 50 per cent in less than six months due to aggressive competition, and the average monthly bill is around $2.73.

Still, executives say India remains a positive story to tell international shareholders. The huge growth potential is particularly attractive in the boardrooms of Europe, where the telecom sector is more mature. The scandal, however, has been sobering for the foreign competitors who hoped to grab a piece of the lucrative Indian market.

"What it means for foreign companies going into India is that they need to get a better handle on what their fiduciary and legal responsibilities are in this part of the world," says Kasi Rao, who helps Canadian companies in India. "It is important to partner with highly established and reputable Indian legal and accounting organizations, both domestic and international, who can actually tell you how to make your way through this."

Mobile companies have been so successful here because, like much of the developing world, India has very little land-line infrastructure. And few among the rural poor own computers. That means mobile phones are, for many, the only digital experience. "Things that are normally done on the PC or the TV are done on mobiles," says D. Shivakumar, managing director in India for Nokia Corp. "You don't need a camera, you don't need a radio, you don't need a watch – it's all rolled into a mobile phone. With 3G, that will move to the Internet."

Companies scrambling to cash in on growth are also providing much-needed innovations: Mobile commerce for villages without banks, mobile microfinance for the poor and e-government initiatives to extend services into rural areas. Bharti Airtel, India's biggest wireless player with about 170 million wireless customers across South Asia and Africa, is the industry beacon behind much of this. It has been untouched as the scandal engulfs its competitors. "Very often innovation is taken to mean new products and services, R&D labs – we actually very proudly proclaim that we don't do that," says Atul Bindal, Bharti's president of mobile. "What we would do is just benchmark across the globe – both in the sector and outside – and we will just pluck and cut-and-paste, and adapt that to Indian use."

But the sector's reputation is now in tatters. With the scandal grinding its way through India's lethargic judicial system, it's unclear when the wireless industry will recover its reputation. "Telecom was India's showcase industry," says Sridharan Ramakrishnan, executive editor of the ET Now business news network. "It was clearly India's big success story. It was something that we could, as a country, after IT, possibly do right. That whole issue has now come under a cloud."

There is, though, at least one silver lining, apparent in the widespread protests gripping the country in recent weeks: Indians are clearly fed up with their country's ubiquitous corruption, and are hungry for change.

"It's a tipping point for us, for India," says Mr. Swamy, who has filed petitions to nullify the telecom licences and have them re-auctioned. "People have just had enough. … They're willing to come out onto the streets, to protest. This is a new phenomenon."

Their outrage has been stoked by a string of other scandals, from infrastructure companies paying bribes to win construction contracts, to government officials obtaining land allotted for war widows. "It's not just in telecom, the corruption is everywhere," says P.S. Seshadri, a manager with Unisys Global Sourcing in Bangalore. "But the people are more vociferous now."

Vijay Karumanchi, who runs an online group-coupon company called Deal Getters based in Toronto and Hyderabad, is part of the informal new movement in India's middle class. "I have never paid a bribe," he says. "If you stop paying, they will stop asking."

As for the telecom case, Mr. Ramakrishnan doesn't think the licences were worth anywhere near $40-billion. But he does believe the scandal could be a watershed moment. "In some sense, this is our own Jasmine Revolution," he says in a chic Mumbai hotel. "We have a democracy, so we have no dictator to overthrow. But corruption is as bad as a dictator. That's what people came together to overthrow. … This is the new India you're seeing."



Indian Prime Minister Manmohan Singh called a meeting of all political parties on Wednesday to help douse anti-corruption protests that have spiralled in the past week. Here's a look at some of the major corruption issues facing the ruling Congress party:

Anti-corruption legislation

The government has been in deadlock with social activist Anna Hazare about a parliamentary bill, first tabled in 1968, to create a special ombudsman to prosecute ministers, bureaucrats and judges. By going on a fast and mobilizing thousands of supporters, Mr. Hazare prompted the government to reintroduce the legislation.

Telecoms licensing row

India may have lost up to $40-billion (U.S.) in revenue when the telecoms ministry gave out lucrative licences and radio spectrum in 2007-2008 at below-market prices, the state auditor has said. In a report last fall, India's Comptroller and Auditor-General said rules were flouted when the licences were awarded, which led to many ineligible firms winning licences. Telecoms minister Andimuthu Raja was sacked after the report was released.

Commonwealth games fiasco

Controversy has swirled around last October's 2010 Commonwealth Games, held in New Delhi. Construction of major structures such as stadiums and athlete housing missed a series of deadlines, ran many times over their original cost and were shoddily maintained, which became a PR disaster for the government.

Space agency scandal

India's space agency is being probed for granting a private firm a lucrative mobile Internet bandwidth in 2005 without a proper bidding process; reports say it has cost the government up to $44-billion. Mr. Singh, who personally oversees India's space ministry, denies any revenue was lost.

Housing scam

Congress party officials, bureaucrats and military officials, including the former army chief, have been accused of taking over a plush Mumbai apartment block intended for war widows. After the news was reported, the government fired the powerful chief minister of western Maharashtra state, a Congress party member.


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