New Delhi:  In a huge embarrassment to the Government and a jolt to the telecom sector, the Supreme Court on Thursday cancelled 122 2G licences granted during the tenure of former telecom minister A Raja declaring it as "illegal" and blamed the government's flawed first-come-first served policy.

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Bringing the curtains down on the controversial allocation by Raja in 2008, the court strongly indicted him over the manner in which he manipulated the issue of licenses and ordered that the licenses in 22 circles be sold by auction for which the TRAI will make fresh recommendations.

A two-judge bench comprising justices G S Singhvi and A K Ganguly allowed the impugned licenses to run for four months after which the cancellation order will become operative.

The court imposed heavy costs of Rs five crore on Etisalat DB Telecom Pvt Ltd (Swan Telecom Ltd), Unitech Wireless Group and Tata Teleservices Ltd, who were benefited by a "wholly arbitrary and unconstitutional" action of award of licenses to them and for off-loading their stakes for many thousand crores in the name of fresh infusion of equity or transfer of equity.

It ordered Loop Telecom Pvt Ltd, S-Tel, Allianz Infratech and Sistema Shyam Tele Services Ltd, who were also beneficiary of the decision, to pay a cost of Rs 50 lakhs each.

The Apex Court said the allocation of the 2G spectrum under Raja was "wholly arbitrary, capricious and contrary to public interest apart from being violative of the doctrine of equality" to "favour some companies at the cost of the public exchequer".

The bench, while pointing out serious lapses by the DoT slammed the department and Raja for not heeding to the Prime Minister's advise that "transparency" and "fairness" should be adopted in the allocation of scarce spectrum.

It also criticised the TRAI's role in the entire episode saying that the regulator's approach was "lopsided" and "contrary to the decision taken by the Council of Ministers" and its recommendations became a "handle" for Raja who "virtually gifted away the important national asset at throw away prices".

Rejecting the Attorney General's arguments that the government's policy decision for private sector participation cannot be scrutinised by the court, the bench cited earlier judgements including the Reliance gas dispute and said that it is the solemn duty of the state to protect the national interest.

"National resources be always be used in the interest of the country and not private interests," it said. The court said that it cannot be denied that TRAI is an expert body but in view of the facts that have emerged in the case "we have no hesitation to record a finding that the recommendations made by TRAI were flawed in many respects and implementation thereof by the DoT resulted in gross violation of the objectives of national policy on telecom, 1999."

The Centre adopted a wrong policy of first-come-first served in allocating the "scarce" resource at a "throw away price" to "favour" some corporates, it said.

The court said that it had no doubt that if the method of auction had been adopted for grant of licence, which could be the only rational transparent method for distribution of national wealth, the nation would have been enriched by "many thousand crores".

"The exercise undertaken by the officers of the DoT between September, 2007 and March 2008, under the leadership of the then telecom minister A Raja was wholly arbitrary, capricious and contrary to public interest apart from being violative of the doctrine of equality," the court said.

Detailing the way Raja issued licenses, the court said "Not only this, within few hours of the receipt of the suggestion made by the Prime Minister in his November 2, 2007 letter that keeping in view the inadequacy of spectrum, transparency and fairness should be maintained in the matter of allocation of the spectrum, the Minister rejected the same by saying that it will be unfair, discriminatory, arbitrary and capricious to auction the spectrum to new applicants because it will not give them level playing field".

It said Raja took an arbitrary action of advancing the cut off date from October 1, 2007 to September 25, 2007, which was "actually intended to benefit some of the real estate companies who did not have any experience in dealing with telecom services".

"He (Raja) simultaneously introduced cut off date as 25.9.2007 for consideration of the applications received for grant of licence despite the fact that only one day prior to this, press release was issued by the DoT fixing 1.10.2007 as the last date for receipt of the applications.

"This arbitrary action of the Minister of C&IT though appears to be innocuous was actually intended to benefit some of the real estate companies who did not have any experience in dealing with telecom services and who had made applications only on 24.9.2007, i.e. one day before the cut off date fixed by the Minister of C&IT on his own," the bench said.

The court dubbed as "stage managed" the entire process of grant of Letters of Intent to the telecom companies for the 2G licences by which some of the firms which had applied prior were "pushed down" in priority list to favour others.

"The manner in which the exercise for grant of LoIs to the applicants was conducted on January 10, 2008 leaves no room for doubt that every thing was stage managed to favour those who were able to know in advance change in the implementation of the first-come-first served principle.

"As a result of this, some of the companies which had submitted applications in 2004 or 2006 were pushed down in the priority and those who had applied between August and September 2007 succeeded in getting higher seniority entitling them to allocation of spectrum on priority basis," the bench said.

While declaring the allocation of licences as "illegal", the bench said any allocation of 2G spectrum be carried out by way of "auction" as has been done in the 3G band.

However, it clarified that its direction shall become operative after four months during which TRAI will make a fresh recommendation within two months and Government will take a decision a month thereafter.

"TRAI shall make fresh recommendations for grant of licence and allocation of spectrum in 2G band in 22 Service Areas by auction, as was done for allocation of spectrum in 3G band," the bench said adding that the Centre shall consider the recommendations of TRAI and take appropriate decision within next one month and fresh licences be granted by auction.

The bench also brushed aside Attorney General G E Vahanvati's contention that judiciary should keep itself away from policy matters and should not ordinarily interfere with the policy decisions of the Government in financial matters.

"There cannot be any quarrel with the proposition that the Court cannot substitute its opinion for the one formed by the experts in the particular field and due respect should be given to the wisdom of those who are entrusted with the task of framing the policies.

"However, when it is clearly demonstrated before the Court that the policy framed by the State or its agency/ instrumentality and/or its implementation is contrary to public interest or is violative of the constitutional principles, it is the duty of the Court to exercise its jurisdiction in larger public interest and reject the stock plea of the State that the scope of judicial review should not be exceeded beyond the recognised parameters.

"When matters like these are brought before the judicial constituent of the State by public spirited citizens, it becomes the duty of the Court to exercise its power in larger public interest and ensure that the institutional integrity is not compromised by those in whom the people have reposed trust and who have taken oath to discharge duties in accordance with the Constitution and the law without fear or favour, affection or ill will and who, as any other citizen, enjoy fundamental rights but is bound to perform duties," the bench said.

On the role of TRAI, the bench said the recommendations made by it were "flawed in many respect and it needed judicial review.

"Therefore, even though the scope of judicial review in such matters is extremely limited, keeping in view of the facts which have been brought to the notice of this Court, we have no hesitation to record a finding that the recommendations made by TRAI were flawed in many respects and implementation thereof by the DoT resulted in gross violation of the objective of New Policy on Telecom, 1999," it said.

The bench said if the vigilance by some enlightened citizens would not have been on the issue of 2G licenses, the scarce natural resource would have been "grabbed" by those who enjoy "money power" and "manipulate" the system.

"We consider it imperative to observe that but for the vigilance of some enlightened citizens who held important constitutional and other positions and discharge their duties in larger public interest and Non Governmental Organisations, who have been constantly fighting for clean governance and accountability of the constitutional institutions, unsuspecting citizens and the Nation would never have known how scarce natural resource spared by the Army has been grabbed by those who enjoy money power and who have been able to manipulate the system," the bench said.

The court, which imposed hefty costs on the errant telecom companies, said that 50 percent of the money shall be deposited with the Supreme Court Legal Services Committee for being used for providing legal aid to indigent litigants and the remaining 50 percent shall be deposited in the Prime Minister's Relief Fund.

It also clarified that the observations and conclusions contained in this order shall not, in any manner, affect the pending investigation by the CBI, Directorate of Enforcement and others agencies or prejudice the defence of those who are facing prosecution in the cases registered by the CBI.

Further, the Special Judge, CBI shall decide the matter uninfluenced by this judgement.