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Why is the telecom sector under stress?

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Why has the Supreme Court order backing the Department of Telecom’s definition of adjusted gross revenue hit the telcos?

The story so far: On October 24, in a strongly-worded order, the Supreme Court of India upheld the Department of Telecom (DoT)’s interpretation of “adjusted gross revenue” (AGR), which came as a huge blow to telecom service providers. Following the order, the telcos are now staring at dues of an estimated ₹1.4 lakh crore, which needs to be paid to the government within three months. Most industry players and analysts have argued that the payout of the huge amount could be the final straw for the already distressed sector.

Why is AGR important?

The definition of AGR has been under litigation for 14 years. While telecom companies argued that it should comprise revenue from telecom services, the DoT’s stand was that the AGR should include all revenue earned by an operator, including that from non-core telecom operations.

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The AGR directly impacts the outgo from the pockets of telcos to the DoT as it is used to calculate the levies payable by operators. Currently, telecom operators pay 8% of the AGR as licence fee, while spectrum usage charges (SUC) vary between 3-5% of AGR.

Why do telcos need to pay out large amounts?

Telecom companies now owe the government not just the shortfall in AGR for the past 14 years but also an interest on that amount along with penalty and interest on the penalty. While the exact amount telcos will need to shell out is not clear, as in a government affidavit filed in the top court, the DoT had calculated the outstanding licence fee to be over ₹92,000 crore. However, the actual payout can go up to ₹1.4 lakh crore as the government is likely to also raise a demand for shortfall in SUC along with interest and penalty. Of the total amount, it is estimated that the actual dues is about 25%, while the remaining amount is interest and penalties.

The total amount to the government is owed by about 15 operators. However, 10 of them have either closed operations or are undergoing insolvency proceedings in the last 14 years. They include Reliance Communications, Telenor, Tata Teleservices, Aircel and Videocon. Currently, the Indian telecom sector has four players — Bharti Airtel, Reliance Jio, Vodafone Idea and state-owned BSNL/MTNL (Bharat Sanchar Nigam Limited/Mahanagar Telephone Nigam Limited) — so the government is unlikely to recover the entire amount of dues owed to it.

Of the current players, Bharti Airtel and Vodafone Idea are the most affected by this order. While the total dues of Bharti Airtel are estimated to be about ₹42,000 crore, for Vodafone Idea the amount is around ₹40,000 crore.

The two state-run firms BSNL and MTNL together owe a little less than ₹5,000 crore just as licence fees. The least impacted by the Supreme Court order in the private sector is the relatively new entrant in the market, Reliance Jio. The Mukesh Ambani-owned firm forayed into the sector in September 2016 and owes the government about ₹14 crore.

Is there stress in the sector?

The telecom industry is reeling under a debt of over ₹4 lakh crore and has been seeking a relief package from the government. Even the government has on various occasions admitted that the sector is indeed undergoing stress and needs support. Giving a ray of hope to the telecom companies, the government recently announced setting up of a Committee of Secretaries to examine the financial stress in the sector, and recommend measures to mitigate it. The move came a few days after the Supreme Court ruling.

The Committee of Secretaries, headed by Cabinet Secretary Rajiv Gauba, will have Secretaries of Ministries of Finance, Telecommunication and Law, among others as members and look at “all aspects” of the financial stress. It will also consider some of the long-standing demands of the industry, including granting a delay in payment of dues for spectrum for the next two financial years (2020-21 and 2021-22). This move alone is expected to help telcos avoid an immediate outflow of over ₹42,000 crore, thereby increasing short-term liquidity. The committee will also look at demand of a reduction in the SUC and universal service obligation fund levy.

Interestingly, the Telecom Regulatory Authority of India (TRAI) may also simultaneously examine the merits of a “minimum charge” that operators may charge for voice and data services. Currently, telecom tariffs are among the lowest globally, driven down due to intense competition following the entry of Reliance Jio in the sector. Top-level executives from both Bharti Airtel and Vodafone Idea have in recent meetings with Telecom Minister Ravi Shankar Prasad sought government intervention to increase “unsustainable” tariffs. However, any decision on tariffs comes under the domain of sector regulator TRAI.

Why are the private players fighting?

The rivalry between Reliance Jio and the two older operators, Airtel and Vodafone Idea, is not new. The two sides have been engaged in a public row ever since Jio’s entry into the telecom market over a variety of issues. It is not much of a surprise that the two sides do not see eye to eye even on the issue of financial stress in the sector.

Reliance Jio earlier this week shot off a letter to Mr. Prasad strongly objecting to the relief sought by the other two players, and also stating that they both had the financial capacity and monetisation possibilities to “comfortably” pay government dues.

The Mukesh Ambani-owned firm pointed out that the Cellular Operators Association of India, the industry body of which Jio is also a member, in its letter to DoT on the industry’s behalf did not include Jio’s comments. It further added that the COAI had used a “threatening and blackmailing” tone with the government by referring to a possibility of a loss of jobs and investments in the sector if relief was not provided.

Jio has also alleged that these operators have not provisioned for the possibility of the liabilities following the Supreme Court judgment, which is binding on them as per the Indian Accounting Standards under the Companies Act, 2013. The other operators have maintained that the definition of AGR has been sub-judice since 2005 and that before the Supreme Court order, most rulings in several other courts, including the Telecom Disputes Settlement and Appellate Tribunal, have largely been favourable to telecom operators. Hence, these liabilities were not provided for.

Meanwhile, ignoring Reliance Jio’s contentions, the COAI has sent off another note to DoT, requesting complete waiver of statutory dues as a result of the top court’s order.

Is India going to be a three-player market?

The country’s telecom sector has seen a lot of consolidation over the past couple of years as a result of intense competition. Recently, the government also announced plans to merge the two telecom public sectors units, BSNL and MTNL, leaving only four players in the market. Many analysts have pointed out that in the event that the government does not announce any relief measures for the sector, Vodafone Idea would be in a “precarious situation”, adding that there is a strong possibility that the Indian telecom market could eventually have only two private players.

This was also followed by reports stating that the company is looking at exiting the Indian market. However, Vodafone Group dismissed these as “not true and malicious”.

What happens next?

All the hopes of the industry are now pinned on measures the government announces as part of the relief package for the sector.

On the AGR-related dues, the operators have said that they are seeking clarity from the government on the total amount and have requested support to deal with this “adverse” outcome. The industry body has sought waiver of the complete amount, or at the least, the interests and the penalty charges. However, some experts have questioned whether the government can waive these amounts, given that the Supreme Court has explicitly said in its judgment that interest and penalty have rightly been levied. The top court had held: “... we find no substance in the submission that interest, penalty, and interest on penalty cannot be realised. It is as per the agreement. In the facts and circumstances, we find no ground to reduce the same, considering the nature of untenable objections raised on behalf of the licensees.” The operators may also explore legal options and file for review.

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Printable version | Dec 6, 2019 4:10:06 AM | https://www.thehindu.com/business/Industry/why-is-the-telecom-sector-under-stress/article29865316.ece

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