The Supreme Court of India delivered a landmark judgment in late October 2019 regarding the AGR (Adjusted Gross Revenues) of the various telecom operators in India. The case was between the Department of Telecommunications (DoT) and India’s telecom companies primarily over what constituted AGR. As India moved from a fixed licence fees to a revenue sharing fee model, it was agreed that the telcos would share a percentage of their AGR with the government as annual licence fee (LF) and spectrum usage charges (SUCs). The LF was fixed at 8% of AGR and the SUC would be from 3% to 5% of AGR.
The dispute then arose between DoT and the mobile operators over the definition of AGR. DoT wanted AGR to be made up of all revenues from both telecom and non-telecom services. The telcos argued that the AGR should comprise only the revenue received from the core telecom services and must not include other non-telecom revenues like dividend, interest income, profit on sale of any investment or fixed assets. Essentially this dispute has been going on since 2005 between the DoT and the telcos with the law favouring the telcos until 2015. Thus, when the apex court (in October 2019) overturned the earlier position regarding AGR and ruled in favour of DoT, it sounded the death knell for India’s mobile operators who were not in a position to pay their newly calculated dues to the government.
The AGR issue again came up before the Supreme Court this month. A three-judge bench headed by Justice Arun Mishra came down heavily on the non-payment of the AGR by telcos. They had (90 days period) a deadline of 23 January 2020. Justice Mishra also reprimanded the government for letting the telcos delay their payments. He really had some harsh words for the government over the fact that the Supreme Court judgment had not been implemented and was “stayed’’ by a desk officer of the government. Some of the chastising words that the Hon’ble Judge used are: “If this is not the outcome of money power…. Is there no law left in this country? I am literally anguished. This cannot happen in this country. We cannot function in this fashion. Let’s wind up the Supreme Court…. It is better to leave this country. They can stay the order? There is so much money power.”
IMPACT OF DOT VICTORY OVER INDIAN TELCOS
Around 40 companies hold a telecom licence in India. The government (DoT) could demand licence fees, penalties and interest on penalties from these companies. Typical calculations reveal that that amount is to the tune of Rs 94,000 crore for the last 5 years and more than 2.8 lakh crore if we go back calculating the dues for the last 10 years. The telecom sector is reeling under a debt of Rs 7 lakh crore with heavy investment into 4G and 5G rollouts, a declining revenue stream and wafer-thin profit margins.
Vodafone Idea Ltd, the second largest Indian telco with 336 million subscribers, will be the hardest hit by this ruling on AGR. According to a report in the Economic Times (07 November 2019) – “Telecom service providers such as Bharti Airtel and Vodafone Idea, party to the case since 2003, have to pay licence fees, interest, penalties and interest on penalties amounting to over Rs 92,000 crore on revenue that has accrued to them from all activities. The carriers would also have to pay spectrum usage charges (SUC) amounting to nearly Rs 41,000 crore for a period of about 16 years.” Telecom analysts say that Bharti Airtel appears to be better prepared to pay its dues compared to Vodafone Idea. Airtel has to pay about Rs 35,000 crore of which it has already paid Rs10,000 crore. Airtel recently raised $ 3 billion and it may sell many of its assets to make the required payments to DoT.
The situation of Vodafone Idea, however, is not that good. It does not have a strong balance sheet nor assets to help tide it over the immediate requirement of funds. It has paid only Rs 2,500 crores of the Rs 50,000 crore dues. The promoters of this group namely Aditya Birla and Vodafone Plc are not keen to pump more funds into the venture and are ready to take the bankruptcy and insolvency route if the government refuses to bail them out by way of the waiver of charges or gradual payment over a long stretch of time. If Vodafone Idea exit, the Indian telecom market will essentially become a duopoly and this will have a huge impact on the entire telecom ecosystem in India.
NOT A GOOD SIGN
One has to understand that the exit of Vodafone Idea is not a good sign. For one, 13,000 jobs will be shed at the time when India has breached historical levels of unemployment that it never did for decades. Economic Times reports – “The Supreme Court on Monday rejected Vodafone Idea’s appeal to direct the DoT not to invoke its bank guarantees for recovering AGR-related dues. The telco’s lawyer Mukul Rohatgi had warned that if the bank guarantees were encashed, the company would have to shut down.” This extreme situation may lead to a steep jump in NPAs for banks, which again will have a cascading effect on the economy and India’s international reputation. Some financial analysts predict that the Vodafone Idea bankruptcy will increase India’s fiscal deficit by 40 basis points. The porting out of 300+ million subscribers from a provider is also not a pretty picture for any telecom market.
The government is in a bind as it does not want to offend the judiciary and be overseeing the biggest shakeup in the telecom market that will have a catastrophic impact on the economy. The proposed 5G auction and rollout in fiscal 20-21 is now in a cloud. The third major telco is state-owned – BSNL. It is already very weak financially and does not enjoy a good reputation in the market. Therefore, if only Reliance-JIO and Bharti Airtel remain the major players then the market will be a duopoly and it is bound to affect the quality of service and the pricing of telecom services for the consumer.
SOME CORE ISSUES
Some very troubling questions are not being raised during this entire fiasco. What is the international norm of calculating the AGR? Why did the telcos decide not to incorporate the revenue they might have to forgo in their balance sheets in the likely case they lose the AGR case? Those who side with the government position on AGR say that it is becoming a norm for corporate-India to carry on the principle of “privatisation of profits and nationalisation of losses”. They say that the private sector likes keeping profits for themselves but want the government (public at large) to bail them out when they face losses.
Another thing that we must realise is that the major portion of the dues that the beleaguered telcos have to cough up consists of interest on unpaid dues and interest on the penalties. The role of interest in the supply of credit and its efficacy needs to be analysed in an unbiased manner and alternative methods like 100% equity financing must be examined. We need to investigate the impact of Reliance-JIO in the market and the role of the government in facilitating its ascent to become the biggest telecom provider of India in such a short span of time.
Finally, we should debate the role of government in business. How much should it interfere and regulate industry? Is the Indian telecom consumer suffering because of an unnecessary and overbearing government trying to control the market or does he/she need a “laissez-faire” approach to get the best business deal. In the words of Paul Samuelson – “…the mystical principle of the invisible hand that each individual in pursuing his own selfish good was led, as if by an invisible hand, to achieve the best good of all, so that any interference with free competition by government was almost certain to be injurious.” Had he been alive, Adam Smith would not be a happy man in India.