Why DoT felt RCom should be fined Rs 50 cr for rural switch off

Last Friday, Firstpost published an exclusive story on how Anil Ambani’s Reliance Communications (RCom) received  a huge financial reprieve after Telecom Minister Kapil Sibal lowered the penalties payable by the company for unilaterally switching off its rural telephony base stations – a service it had agreed to provide under the Universal Service Obligation Fund (USOF). The purpose of the USOF is to ensure that even remote locations are serviced by telecommunications and there is no pressure on any operator to do these services unless they opt to do so. It is often subsidised, and the infrastructure like base transceiver stations are shared by upto three operators. [caption id=“attachment_35983” align=“alignleft” width=“380” caption=“Union Telecom Minister Kapil Sibal. PTI”]  [/caption] But RCom, according to Department of Telecom documents, “unilaterally” switched off these services on grounds of unviability and several other reasons. The company gave its reasons in a letter to USOF dated 7 December, that it was switching off some base transceiver stations (BTSs) with effect from 22 November, and the rest would go off by 31 March 2011. Upset by the company’s decision to do so without prior discussions with DoT, the Administrator of the USOF shot off a show cause notice to Devinder Singh, President of RCom, on 21 December, giving its reasons why the company’s decision was simply illegal. USOF also asked the company to reply within 15 working days why it should not be penalised with the highest fine of Rs 50 crore payable under the Unified Access Service Licence (UASL) for terminating its services unilaterally. The show cause was sent in the name of Ravindra Kumar, Additional Director-General of the USOF, and a copy was marked to Anil Ambani, the promoter of RCom. In this story, Firstpost gives you the full text of the USOF’s show-cause notice, and the full text of the note proposing the imposition of the penalty of Rs 50 crore on the company. The full document is available in PDF format here, but Firstpost is publishing an annotated version of the text to make things simpler for the reader to understand. The paragraphs from the show cause appear first, and where necessary, Firstpost gives its explanations and comments below. The full text of the Department’s note proposing the penalty, which follows the same logic of the show-cause, come below. TEXT OF UNIVERSAL SERVICE OBLIGATION FUND’S LETTER TO R COM Sub: Show Cause Notice for voluntary, unilateral switch-off of services by M/s RCL Reg. M/s RCL’s request for revised scope in Commissioning Mobile Services under USOF Agreement for Shared Mobile Infrastructure Scheme (Part B) 1.    This is with reference to the letter no RCL/DOT/10-11/5027 dated 07/12/2010 from unnamed authority of M/s RCL wherein M/s RCL has mentioned that they have switched off their radiating BTSs (base transceiver stations) with effect from 22/11/2010 except for the 46 difficult sites and will pay power & fuel bill to respective IPs (infrastructure providers) up to 21st Nov 2010 for these sites. M/s RCL has further mentioned that they will switch off remaining 46 BTSs also in next 2-3 months and will pay power & fuel charges till the switch off date, i.e. up to 31/03/2011. Firstpost note: Note the reference to “unnamed authority”. RCom (RCL, in the department’s note) obviously sent this letter through an employee whose authority to write the note is not clear. 2.    It has further been requested in the referred letter to drop M/s RCL as Part B operator from 28 clusters in addition to the dropping requested in earlier 18 clusters and retain them in 7 clusters only out of a total of 53 clusters (i.e. for 406 sites only in clusters 20, 24, 25, 33, 64, 78 & 79) claiming that (i) the IPs have not fulfilled there roll out commitments in time. (ii) Most of the sites commissioned by IPs do not have SEB connectivity leading to high operating costs besides the difficulties in getting backhaul. (iii) The huge delay completely disturbed the original BTS deployment project dynamics and also led to blocking of huge sums of capital unproductively in the form of electronic equipments lying unutilized in warehouses. This also necessitated increased logistics costs in moving the equipments back to their regions of requirement besides demobilization of I&C contractors. (iv) Due to delay in commissioning of sites by IPs the market dynamics like 1 paisa per second calling and market potential in areas has changed substantially. In sites where services have been commissioned, subscriber acquisition is very low and business viability based on which M/s RCL was selected has substantially changed. (v) Providing services in many low potential clusters, especially when one or more operators having strong presence in the circles are already radiating in those clusters, is extremely unviable. Firstpost note: Para 2 above refers to the case RCom has made for closure of its base stations. The company has said that it will run base stations in only 7 of the 53 clusters it had agreed to because (1) Infrastructure providers (basically Bharat Sanchar Nigam Ltd) had not provided the infrastructure in some places; (2) there is no power from State Electricity Boards (SEBs) in most sites; (3) The delays in providing the sites caused losses to RCom as some equipment was left idle in warehouses and had to be moved to other places at some cost; (4) The market had changed meanwhile because of call rates falling to one paisa a second due to competition; and (5) Since many mobile companies were already providing services in some of these USOF clusters, RCom’s operations were unviable. Part A of the USOF agreements refer to the rollout obligations of infrastructure providers, and Part B to the obligations of service providers like RCom. 3.    In this regard it is to mention that Agreement No. 30-148/2007-USF (Part-B I) and 30-148/2007-USF (Part-B II) dated 16/05/2007 were signed by M/s RCL with Administrator USOF for provision of mobile services in 53 clusters (5118 sites). As per the agreements signed with IP and USPs, the infrastructure site set up by an IP is to be shared by three USPs. These three USPs were selected as an outcome of the bidding process. The successful USP, including M/s RCL, have unconditionally agreed and unequivocally undertaken to fully comply with all the terms and conditions stipulated in the agreements signed with USOFA without any deviation or reservation of any kind per clause No.3 Section-I of the above referred agreements. Firstpost note: The USOF Administrator is telling Reliance that it had agreed to all the USOF’s conditions “unconditionally” and “unequivocally” and hence has no reason to back out. It had bid for offering these services, and hence knew what the conditions were. 4.    Your attention is also invited to the Clause 16(c) and 16(g) of Section-III. General Conditions of the Agreement, as per which the USP represents and warrants to the Administrator that “It has the financial standing and capacity to undertake and perform the obligations in accordance with this agreement” and “it has taken all due diligence in understanding the terrain, including its remoteness and the possible handicaps, hurdles or reasons for delay and shall have no cause of grievance or abatement on this score”. Hence, the issue of viability raised by M/s RCL at this juncture is not acceptable in view of the above as well as the following: 4.1 Delay on part of IP in commissioning of sites cannot be taken as a reason for failure of M/s RCL in performance of its rollout obligations as Part-B obligation starts only after a site is commissioned & declared RFI (Ready for Integration) by the IP. The roll out period for Part-A [i.e. commissioning of infrastructure sites (towers)] of the Agreement has been extended on reasons in the knowledge of M/s RCL and it has also availed the benefit of the same as an IP (M/s. RCL). 4.2 As reported by IPs, only few sites are working without SEB connection, hence the issue cannot be generalized. As per reports from IPs, more than 80% sites already have SEB connection. Further as per agreement providing/getting backhaul is the responsibility of USP for which subsidy is also being paid by USOF and M/s. RCL cannot do away with this responsibility. The statements of M/s. RCL are not based on facts. 4.3 It has been observed that M/s. RCL has not commissioned BTSs at sites already declared RFI by the IPs since long. Therefore, the statement of M/s. RCL that delay in commissioning of Part-A has completely disturbed the BTS Deployment Project Dynamics and blocking of huge sums of capital lying unutilized in the form of electronic equipments lying unutilized in warehouses is irrational and devoid of any documentary evidence in support of the said claim. Had the BTSs been lying unutilized in your warehouses the same could have been deployed on sites which were ready for integration (RFI). Performance of not only M/s RCL but of M/s. RTL also is very poor in respect of commissioning of mobile services. The status of commissioning of BTSs by M/s. RCL and M/s. RTL as on 30 November, 2010, as reported by M/s. RCL and M/s. RTL themselves and concerned IPs is tabulated below:  It may be noted from the above table that only 38.81% of BTSs have been commissioned by M/s. RCL and M/s. RTL till 30th November, 2010 against the sites declared RFI by IPs on 30th September, 2010. This dismal performance/very slow progress of M/s. RCL as well as M/s. RTL has been brought to your notice many times and even during the review meetings held under chairmanship of Administrator USOF but there has been no improvement. 4.4 Regarding deficiencies noticed, if any, in RFI declared sites; it is to mention that as per Clause 14 Section-VIII Special Instructions, it is expected that both IP and USPs will have regular interaction amongst them, maintain close co-ordination to achieve the targeted goal as per the prescribed time schedule. A close liaison is also to be maintained amongst the IP and USPs to sort out any issues arising out of the operation and maintenance of the infrastructure site. Accordingly, any issue with the IP should have been resolved by M/s. RCL in coordination with concerned IPs. However as already stipulated in the said clause of agreement, in case of any dispute, such issues are to be brought into notice of concerned CCA or Administrator USOF instead of taking any action leading to disruption of services. 4.5 Market dynamic like reduction in tariff up to one paisa per second may rather have been a driver to increase rural tele-density, market potential and growth of subscriber base ever since its introduction. Therefore, it cannot be taken as a reason for M/s RCL to move out of the USOF scheme in rural market. 4.6 Further Administrator USOF cannot absolve M/s. RCL of its responsibility to pay FMC (Fixed Maintenance Charges), including power/fuel charges, to concerned IP because settlement of such payments is an issue which comes under the purview of bilateral agreement between RCL (USP) & concerned IP. Administrator USOF has to be kept indemnified and harmless at all times against any direct loss to it or any claim by any third person for any personal injury to anybody or loss to property, movable or immovable, caused by or attributable to any act or omission of the USP or any of his officer employee, agent or professional etc while performing or purporting to perform this agreement. Firstpost note: Para 4 of the show cause is the core of USOF’s case against RCom and goes on to demolish RCom’s arguments one by one. It says that, first, all those given permission to operate under the USOF scheme were supposed to be companies with the means to subsidise operations in remote areas. Also, (1) The delays alleged in infrastructure are irrelevant since RCom was only supposed to operate where they were ready. Moreover, RCom itself as an infrastructure provider in other areas got the benefit of delays in providing infrastructure. Secondly, USOF is challenging RCom’s claim that most base stations don’t have SEB power. USOF says 80% do have SEB power. Third, USOF counter-alleges that RCom and its sister concern RTL (Reliance Telecom) has been going slow on its commitments, having commissioned only 38% of its base stations – only 3205 sites had been commissioned against the committed 8,259 as on 30 November 2010. 5.    In view of the above and the fact that other Part-B operators are providing the mobile services under similar conditions, the reasons cited by M/s. RCL for taking unwarranted action to switch off active infrastructure and closing of sites unilaterally are not tenable. M/s. RCL is using this arbitrary, malafide, unauthorized and irresponsible act as a disguise to show irrelevant, unwarranted & unnecessary concern of M/s. RCL about making business viable for others by switching off its own BTS without any permission and without giving any notice to USOF/DoT/subscribers. The act of M/s. RCL of assuming the role of a self-styled crusader for enhancing viability of other operators by unilaterally switching off its (RCL’s) own BTSs is totally unnecessary and highly irrelevant. Further, the withdrawal of services on commercial viability in a USOF supported scheme is highly uncalled for. Such actions of M/s. RCL are in contravention to the objectives of USOF. Firstpost note: Here the USOF administrator goes for the kill and accuses RCom of an “arbitrary, malafide and irresponsible act” by switching off its base stations. Pointing out that others were still operating services where RCom had chosen to quit, it even mocks RCom’s assumed role of “self-styled crusader for enhancing the viability of other operators by switching off its own base stations.”Ii also points to the argument on non-viability is “uncalled for” since USOF is precisely used for operating in unviable areas. 6.    As per Clause 1.1 of Section- VI OPERATING CONDITIONS of the USOF Agreement for Part-B the Term and Conditions of the Basic Service Operator (BSO) license or CMTS license or UASL license agreement, as applicable, shall prevail and shall be binding mutatis mutandis. Thus, USP has to comply with the terms & condition of  BSO-CMTS-UASL license as applicable, which is valid for 20 years initially with lifelong extension probability. As per clause I section-III “GENERAL CONDITIONS” also USOF agreement is subject to terms and conditions of BSO/CMTS/UASL license agreement. As per clause of 30.3 of  Part V ”OPERATING CONDITIONS” of UASL license agreement the license shall have to ensure continuity of services to its customers unless license is terminated or suspended by the licensor for any reason what so ever. Even otherwise, continuity of services has to be maintained under clause 1(v) Section IV “COMMERCIAL CONDITIONS” and under clause 12. 3 Section III. “GENERAL CONDITIONS” of USOF agreement notwithstanding any dispute or claim or proceedings. Accordingly the act of voluntary and unilateral switch off/closure of BTSs sites by M/s RCL are a clear violation of License Agreement as well as USOF Agreement leading to disruption of continuity of service. Also, there is no provision for the USP to unilaterally exit on its own from discharge of its performance obligations and go scot-free without performing. Further, under clause 10 of license agreement, before any termination or suspension of services, a notice is required to be issued to all concerned, viz. USOF Administrator, DoT, IP and subscribers in the instant case. But no such notice has been served. It is also not clear as to the services of how many subscribers have got disrupted due to said switch off by M/s RCL and what efforts have been made by M/s RCL to ensure continuity of services to them through any alternate mode. Clause 10.2(ii) of license prescribes imposition of a financial penalty not exceeding Rs.50 crores for such violations. Firstpost note: This is where the USOF Administrator takes the call on applying the penal provisions of the Unified Access Service Licence Agreement, which are more stringent than the USOF’s own penalty clauses. These clauses apply to all Basic Service Operators (BSOs), Cellular Mobile Telecom Services (CMTS) operators and operators offering both BSO and CMTS – or Unified Access Service Licences (UASL). The key point is that the clauses governing UASL licences are applicable to operators providing services under USOF services, which are often subsidised by the USOF Fund. While USOF had its own penal clauses for interruption of service, the fundamental clauses governing all operators come from the UASL. 7.     In view of the forgoing the said voluntary and unilateral act of M/s RCL to switch off radiating BTSs without ensuring continuity of service and without permission of USOF Administrator/DoT and without giving any notice to any of the concerned parties is in contravention/violation of above highlighted terms and conditions of USOF agreement as well as UASL license agreement. Therefore, this calls for M/s RCL to show cause within fifteen working days as to why action should not be taken to (i) impose a financial penalty of up to Rs 50 crores as provided for such violations and (ii) blacklist M/s RCL debarring it from participation in all future schemes supported by USOF. This notice is without prejudice to any other remedy available to USOF Administrator and also without prejudice to any other action for the breach of the conditions of USOF agreement as well as UASL license agreement signed by M/s RCL. Kindly acknowledge receipt of this letter. Firstpost note: Here the USOF Administrator points out its rationale for action against RCom. First, RCom did not seek permission to discontinue its services. Second, it made no effort to protect the interests of its customers by making alternative arrangements for providing the service. And, three, it had violated the terms and conditions of both the USOF and UASL agreements. Which is why it asks Reliance why it should not be asked to pay a fine of Rs 50 crore, and be debarred from participating in future schemes supported by the USO Fund. GIVEN BELOW IS THE TEXT OF THE NOTE BY SC KAROL, DIRECTOR OF USOF, EXPLAINING WHY RELIANCE NEEDS TO BE PENALISED RS 50 CRORE ( Click here to see PDF version of this internal note here) Sub: Action Against M/s Reliance Communications Limited [M/s RCL] for violation of terms & conditions of USOF Agreement and UASL Agreement by voluntary, unilateral & unauthorized switching off/closure of services to subscribers from USOF sites without any notice. 1. Agreement No.30-148/2007 USF (Part-B I) and 30-148/2007-USF (Part-B II) dated 16/05/2007 was signed by M/s RCL with USOFA (USOF Administrator) for provision of mobile services in 53 clusters (5118 sites). As per the agreement signed with IP (Infrastructure Provider) and USPs (Universal Service Providers), the infrastructure site set up by an IP is to be shared by maximum three USPs, which were selected as an outcome of the bidding process. All the successful USPs, including M/s RCL, had earlier already unconditionally agreed and unequivocally undertaken to fully comply with all terms and conditions stipulated in the agreements signed with USOFA without any deviation or reservation of any kind as per Clause No. 3 Section-1 of the above referred Agreements. 2. M/s RCL vide letter no. RCL/DOT/10-11/5027 Dated 07.12.2010 [placed at 2/c] intimated that they have switched off their radiating BTSs with effect from 22.11.2010 except for the 46 difficult sites and will pay power & fuel bills to respective IPs up to 21st Nov 2010 for these sites. M/s RCL further mentioned that they will switch off remaining 46 BTSs also in next 2-3 months and will pay power & fuel charges till the switch off date. 3. As per clause 10.1, Section-V of the USOF Agreement, USP shall work within the framework of Technical conditions of BSO (Basic Service Operator), CMTS (Cellular Mobile Telephone Service)/UASL (Unified Access Service Licensee) License. Thus, USOF Agreement invokes BSO/CMTS/UASL License Agreement of USP, the terms & conditions of which have to be complied and that license is valid for 20 years initially with lifelong extension probability. Further, as per Clause 1.1 Section-VI “OPERATING CONDITIONS” of the USOF Agreement for part B, the terms and conditions of the Basic Service Operator (BSO) license or CMTS or UASL license agreement as applicable shall prevail and shall be binding mutatis mutandis. Thus, USP has to comply with the terms & conditions of BSO/CMTS/UASL license as applicable. Moreover, as per clause I Section-III “GENERAL CONDITIONS” also USOF agreement is subject to terms and conditions of BSO/CMTS/UASL license. 4. As per clause 30.3 of Part V “OPERATING CONDITIONS” of UASL license agreement the licensee shall have to ensure continuity of services to its customers unless license is terminated or suspended by the licensor for any reason what so ever. Even otherwise, continuity of service has to be maintained under clause I (V) Section IV “COMMERCIAL CONDITIONS” and under clause 12.3 Section III “GENERAL CONDITIONS” of USOF Agreement, notwithstanding any dispute or claim or proceedings. Accordingly, the act of voluntary and unilateral switch off/closure of BTSs sites by M/s RCL is a clear violation of License Agreement as well as USOF Agreement leading to disruption of continuity of service. Also there is no provision for the USP to unilaterally exit on his own from discharge of its performance obligations and go scot free without performing. Further, under clause 10 of License agreement, before any terminations or suspension of services, a notice is required to be issued to all concerned, viz USOF Administrator, DoT, IP and subscribers in the instant case. But no such notice has been served. It is also not clear as to the services of how many subscribers have got disrupted due to said switch off by M/s RCL and what efforts have been made by M/s RCL to ensure continuity of services to them through any alternate mode. Clause 10.2 (II) of license prescribes imposition of financial penalty not exceeding Rs. 50 crores for such violations. 5. In view of the above, the said voluntary and unilateral act of M/s RCL to switch off radiating BTSs without ensuring continuity of service and without permission of USOF Administrator, DoT and without giving any prior proper notice to any of the concerned parties, is found to be contravention/violation of above highlighted terms and conditions of USOF agreement as well as UASL license agreement. Accordingly a show cause notice was served to M/s RCL (placed at 5/c) to explain within 15 working days (i.e. by 11th January 2011) as to why action should not be taken to (i) impose a financial penalty of up to Rs. 50 Crores provided for such violation and (ii) blacklist M/s RCL, debarring it from participation in all future schemes supported by USOF. A copy of show cause notice was also marked to Licensing Cell for DoT and TRAI, as placed at 5/c. Firstpost note: From paras 1-5, the USOF makes much the same points as the show cause notice sent on December 21, 2010 to RCom’s President It also points out that the USOF agreement has no provision for an operator to exit from the scheme unilaterally. RCom had no option but to seek DoT’s permission before it exited. It also says that since RCom did not say how many customers were affected by its decision to switch off services. It should, thus, be penalised Rs 50 crore and debarred from operating under USOF for three years. 6. M/s RCL vide letter no RCL/DOT/10-11/5063 dated 05.01.2011 [placed at 7c] acknowledged that they have received show cause notice issued by USOF in view of the switching off/closure of radiating BTSs and requested to provide six weeks’ time to submit detailed reply. But M/s RCL was replied that their request for additional six weeks’ time to submit detailed reply can only be considered if switched off sites are revived/restored by M/s RCL immediately under intimation to Administrator USOF [placed at 8c]. Firstpost note: USOF rejects RCom request for more time to reply to the show cause, saying this can be done only if its switches on its services. 7. M/s RCL vide letter no RCL/DOT/10-11/5069 dated 11.01.2011 [Placed at 9c] again requested to provide six weeks time to submit detailed reply. But M/s. RCL neither made its intention clear nor revealed its stand on revival/restoration of BTSs which have been switched off by M/s RCL unilaterally. M/s RCL was asked once again to clear/reveal its stand by 12th January 2011 on revival/restoration of BTSs to facilitate further necessary action in this regard, failing which USOF/DoT shall be constrained to proceed with initiation of action in terms of the provisions of the USOF and UASL agreements and in pursuance of said show cause notice dated 21.12.2010 [placed at 10c] In its reply dated 12.01.2011 M/s RCL is still reported to be internally discussing the issue & has insisted upon USOFA for grant of more time & not to take any action. 8. Accordingly the following position has emerged: (i)    As most of the clusters are with negative subsidy, the option of penalizing the USP by stopping the subsidy is not available. Option of levying penalty & forfeiture of PBG is also not available due to absence of any financial penalty/LD claim clause and non-availability of PBG in the USOF Agreements. (ii)    If there is no clause in USOF Agreement to penalize the USP with negative subsidy, there is no exit clause either to allow it to go scot free without performing. (iii)    As per the clause 7 of the Agreement, the Administrator USOF reserves the right to modify at any time the terms and conditions of the Agreement signed with the USP, if in the opinion of the Administrator it is necessary or expedient to do so in public interest or in the interest of the security of the Stare or for the proper conduct of the service. The decision of the Administrator Shall be final in this regard. (iv)    Had M/s RCL 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/modification of USOF agreement after approval of an exit policy by competent authority in this regard. (v)    M/s RCL’s action of switching off closure of radiating BTSs from/at most of its commissioned sites (which in itself are 38% of total contracted sites) is arbitrary, unilateral unauthorized and in contravention of provisions contained in terms and conditions of USOF & UASL agreements. (vi)    M/s RCL bagged the USOF contract in most of the clusters by predatory/negative bidding and then backed out in the above stated manner without performing effectively, thus sabotaging/jeopardizing successful implementation of USOF scheme. Firstpost note: Several key arguments justifying the fine of Rs 50 crore emerge here. First, the USOF cannot penalise RCom by cutting off its subsidies, since in most instances RCom did not place pre-bid guarantees, and had bid aggressively for the service clusters without seeking subsidies. The USOF cannot demand fines, nor can it allow exits – since there were no provisions for it. The USOF Director could have done this using Clause 7, but hints that RCom forfeited this right by refusing to revive the switched off sites. 9. In view of the above emerged position and no remedial action taken so far by M/s. RCL in response to the show cause notice dated 21.12.2010, the following proposal is hereby submitted. (I)    A financial penalty of up Rs.50/ Crores or any other penal action may now be imposed/taken in M/s RCL by Licensing Cell of DoT under the License Agreement for above stated violations. (II)    M/s RCL may be debarred for at least three years from participation in any future scheme supported by USOF. (III)    A mechanism to bring/substitute USP may be approved by incorporating an exit provision in USOF Agreements, for which a proposal has separately been moved on 13.01.2011. Submitted for kind approval please SC Karol Director (T-1)USOF