Thanks For Nothing: India’s $1 Billion Telecom Swindle

When the American telecommunications company Qualcomm, Inc., paid the Indian government $1 billion in a wireless spectrum auction, it knew it was paying for thin air. But the company didn’t even get that.

With truly garbled logic, India’s Department of Telecommunications (DoT) requires companies seeking spectrum licenses to first win those licenses at auction before applying for permission to use them. Qualcomm won the auction, paid for its licenses, and then was denied the right to do anything with the airwaves it had paid for.

Oh, and that $1 billion is nonrefundable, says DoT.

In the auction, which ended June 12, 2010, Qualcomm won rights to offer wireless broadband services in the Delhi, Mumbai, Kerala and Haryana service areas. Because of a rule requiring licensees to be located within the area they serve, Qualcomm created four new entities, one for each area. In August 2010, it submitted applications to use its licenses in each jurisdiction.

Then India’s infamous bureaucracy went to work. The DoT recently said it rejected the applications because Qualcomm failed to meet an October 2010 deadline. It acknowledged that the applications, had, in fact, been submitted in August, well before the deadline, but that submission was not sufficient because Qualcomm filed revisions in December. The department ignored the fact that those revisions were sent in response to the government’s own request for more information. The DoT also claimed that Qualcomm was prohibited from nominating more than one company to use its rights and therefore should have applied for a single license for all four regions, the rule about licensees’ locations notwithstanding.

According to the rules of the auction, “if at any stage, the spectrum allocation is revoked, withdrawn, varied or surrendered, no refund will be made.” Qualcomm, therefore, may end up forfeiting all the money it paid. The DoT has referred the matter to the law ministry for legal advice, a spokesman from India’s Ministry for Communications and Information Technology told The Wall Street Journal.

As developing countries become increasingly important players in the global marketplace, stories like Qualcomm’s are becoming all too familiar.

For many American companies, opportunities in countries such as India, China and Russia are proving too good to pass up. ExxonMobil recently struck a major deal with Russia to gain oil exploration rights in a Russian portion of the Arctic Ocean. The amount that could potentially be exchanged was large enough to prompt Prime Minister Vladimir Putin to say, “It’s scary to utter such huge figures.”

Putin, however, isn’t the one with something to fear. Just five years ago, Russia turned on another foreign oil company, Royal Dutch Shell. After Shell had spent about 10 years and more than $20 billion on an offshore development near Sakhalin Island, the Russian government forced the company to sell the operation to the state-run company Gazprom.

India, China and Russia have all shown that they’re not ready to play by globally accepted rules. Of the three, India is the closest to being a responsible trade partner, but it still suffers from substantial corruption, opaque regulations and a creaky court system that takes far too long to adjudicate disputes. The DoT has become particularly notorious. In 2008, then telecommunications minister Andimuthu Raja was arrested on suspicion of being involved in rigging licensing processes for 2G services.

A company that is prepared to pay $1 billion or more to a foreign government ordinarily ought to be big enough to take care of itself, and enterprises that choose to operate abroad have a responsibility to learn the rules of their new terrain. But when a government on one side of a deal abuses its position to effectively steal from foreign corporations’ treasuries, the other government has an obligation to step in to defend its commercial interests.

This is the case in the Qualcomm dispute. Despite its invocation of “rules,” the Indian DoT is operating in a way that no reasonable, rule-based system could. India is free to do whatever it wants with its wireless spectrum and its telecom industry, but it has a responsibility to do so in a way that treats all players fairly and makes all the relevant rules clear. If India wants to bar foreign companies from obtaining licenses, it can. But it cannot tell foreign companies they can bid for licenses during auctions and then change the rules when it comes time to deliver those licenses.

Qualcomm has a right to expect help – a lot of help – from Washington in this fight. The U.S.-India relationship won’t rise or fall on this one deal, but it is the U.S. government’s responsibility to ensure that American investors are treated with at least a basic level of fairness.

In most transactions, caveat emptor is a good rule of thumb. Foreign governments that think they can swindle large American companies without consequences should be given reason to beware as well.

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