I was finally able to complete creating the licenses for my site. The method I was doing before was stupid and completely wrong. Thanks to Mir for pointing me out in the right direction. Here is the steps on how I ended up creating licenses for my Mediawiki.
HOW TO CREATE LICENSES: - Tutorial
In order to create licenses you need to do the following steps:
1) First figure out what licenses you want to list in your wiki. Its best to look at some samples to get an idea. Here are a few samples you can have a look at:
Licenses Samples:
MediaWiki Licenses: https://www.mediawiki.org/wiki/MediaWiki:Licenses
Wikipedia Licenses: http://en.wikipedia.org/wiki/MediaWiki:Licenses
https://en.bitcoin.it/wiki/MediaWiki:Licenses
http://qed.princeton.edu/main/MediaWiki:Licenses
2) Next step is to create the list of licenses in Mediawiki:Licenses page. The format used for this is like this: "template name|descriptive label." Once you add the list, the Drop-down list is displayed on Special:Upload.
3) Once you create the license list, when you view it in the Special:upload page by selecting that license, you will see a red link to that template. follow the red template links that appear below the license selection drop down menu on special:upload when you select a license from it and put info boxes in each of those respective template pages. Eg, if one of your license choices is "* Unknown | I don't know" then you want something informative in [[template:unknown]], see template:unknown.
4) Create a template for that license. Here you can have a look at some of the license templates used in wikipedia or other sites and create your own template like that. You can add div tag to add border styles, background colours, padding, etc.. the way you want it. You can also add images for the common licenses like Creative Commons, Public domain, etc.. and most of these images are usually available in default Mediawiki install itself.
5) Once the templates are created, those license templates will be loaded when the license is selected in the Special:Upload page.
Thats it!
In the future when you create new license templates, its better to copy an existing template, look at wikipedia for the sample and just change the license text and image for that new license you are about to add. Its that easy. In the end remeber to add that new license to the Mediawiki:Licenses page.
Hope this makes sense to other newbies like me... :)