Addressing the company’s annual general meeting on August 12, 2019, Chairman, Reliance Industries Limited (RIL), Mukesh Ambani had announced a road-map for Reliance to become a net debt-free company before March 31, 2021. That was the time when, the telecom industry was passing through an unprecedented crisis with most of the companies having huge debt in their books and not generating adequate cash flows for servicing the loans (Reliance Jio – the telecommunication unit of the conglomerate – was the lone exception). The crisis was aggravated by an order of the Supreme Court (SC) on October 24, 2019 directing telecom companies to pay ‘unpaid’ dues towards license fee and spectrum usage charges [SUC].
The order was the culmination of a long-drawn court battle between department of telecommunication (DoT) and service providers with the former insisting that for determining the license fee and SUC which is charged as a percentage of adjusted gross revenue (AGR) (@ 8% and 3% – 5% respectively), apart from telecom services revenue, AGR should also include revenue from non-telecom services viz. rent, profit on sale of fixed assets, dividend, interest etc, the latter opposed it. The SC upheld DoT view.
The service providers were required to pay the excess amount. These were Vodafone Idea Limited [VIL]: Rs 53,000 crore, Bharti Airtel: Rs 36,000 crore (the impact on RJio was negligible at Rs 13 crore). As a result, VIL and Bharti Airtel reported a staggering loss of Rs 51,000 crore and Rs 23,000 crore respectively for the second quarter of financial year 2019-20. Six months thereafter, even as VIL remains on the brink and Bharti Airtel continues to struggle to come out of the red, RJio registered record profit during 2019-20 and continues to increase its gains during the current year.
What is even more redeeming is that Reliance has achieved zero debt as on date – much before the target date indicated by Ambani. It has raised an unprecedented Rs 168,000 crore from global investors in less than two months (this includes Rs 115,000 crore raised from global tech investors by selling a little less than 25% share on Jio Platforms Ltd (JPL) – new incarnation of RJio – and another Rs 53,000 crore through a rights issue to existing investors). This is higher than the debt of Rs 161,000 crore (March 31, 2020).
While, the woes of telecom operators are often blamed on high burden of government levies, the fact remains that one of them (read: JPL/RJio) continues to shine despite paying these levies. This has to do with the policy and regulatory environment. On the policy front, even as other operators paid gargantuan sums for obtaining license and spectrum, JPL/RJio got these at much lower cost.
Reliance Jio acquired an internet service provider (ISP) license from a lesser known company Infotel Broadband Services Pvt Ltd (IBSPL) in 2010; the latter had won, in that year, pan-India broadband wireless spectrum (BWA) by paying Rs 12,837 crore or 5,000 times its net worth of Rs 2.5 crore in a government auction.
In 2013, the government issued fresh guidelines which allowed ISPs owning airwaves for BWA to get a unified license (UL) to provide voice services also using these airwaves by paying an additional fee of a mere Rs 1,658 crore – a price that telcos paid in 2001 when the sector was still in its infancy and was struck down by the Supreme Court (SC) in its 2012 order as being totally unrealistic.
The Comptroller & Auditor General of India, in a draft report, had pointed out these anomalies and surmised that “RJIL appeared to have been accorded an undue advantage of Rs 22,848 crore”.
Put simply, the licensing and spectrum allocation policies were dovetailed to favor RJio. The company was also helped brazenly by the Telecom Regulatory Authority of India (TRAI). To understand this, let us look at some hard facts.
In September 2016, in a bizarre move rarely seen before, RJio entered the market with ‘free’ and ‘unlimited’ voice calls and low-cost data. After the introductory offer for free – both data and voice for 6 months, from April, 2017, it charged data at throwaway price Rs 50 per GB, even as voice calls continue to be free ad infinitum.
This was a brazen case of ‘predatory’ pricing with the sole intent to snatch users from incumbent operators. They were forced to reduce tariff drastically to match RJio. Post-revision, the tariff in India at less than US$ 1 per GB is a fraction of what customers in other countries pay (US$30 in Japan; US$18 in Korea; US$15 in UK, China and Germany; US$10 in USA). This pushed almost all incumbent operators into red. Many downed shutters while others were bought over. From over a dozen prior to RJio’s entry, the operators are now down to 3.
When, predatory pricing happens, it is for the regulator viz. TRAI to make timely intervention. It should have nipped the problem in the bud. But, it saw nothing wrong in this practice. Adding salt to the injury, in February 2018, it came out with fresh amendments to the Telecom Tariff Order [TTO] to define predatory pricing in a manner so as to give legitimacy to the actions of RJio.
As per the amended order, a tariff is considered predatory if in a relevant market [circle], an operator who is a significant market player [SMP] offers services at a price that is below its average variable cost [AVC] with a view to reduce competition or eliminate competitors in that relevant market. An operator will be considered SMP if ‘it controls 30% market share or above’, which is calculated on the basis of gross revenue and subscriber market share.
Put simply, TRAI defined a firm to be a predator if (i) it offers services at less than AVC and (ii) it has market share > 30%.
During the relevant period 2016-17/2017-18, even as all firms were selling below AVC, incumbent operators had market share > 30% (natural as they had been around for over two decades) whereas, RJio had share of < 30%. So, in the eyes of the regulator, the former were predators even as the latter was not. In other words, a company which started it all (read: RJio) was termed innocent even as others who suffered due to its onslaught were charged of indulging in predatory pricing and scuttling competition.
The amended order was ‘one-sided’ and ‘discriminatory’ aimed at favoring RJio and unfairly targeting incumbent players. The order was challenged before Telecomm Disputes Settlement Appellate Tribunal [TDSAT]. The Tribunal set aside the order of TRAI and observed it was ‘non-transparent’. But, by the time TDSAT gave its verdict [December 13, 2018] the damage was already done.
Other actions of the TRAI such as steep cut in the Interconnect usage charge (IUC) (it is a charge the telecom service provider of a caller pays to the telco on whose network the call terminates) in September 2017 from the 14 paisa per minute to 6 paisa per minute also impacted the incumbent operators.
All put together, the policy and regulatory dispensation has consistently favored RJio to the detriment of majority of other players. The inevitable is before us. At present, there are only 3 players (down from over a dozen 5 years ago). In fact, VIL is on the verge of closure (both the partners in this joint venture have given enough hint in this regard). A mere 2 service providers for a population of 1.35 billion does not augur well for the country. Today, the consumers may not feel the pinch even as they get access to services at cheapest rate. But, they remain vulnerable in a market monopolized by 2 firms. This anomaly must be corrected.
While, we should aim for at least six players, for now, the focus should be on ensuring that both VIL and Airtel stay on. The impact of past regulatory bias can’t be undone. However, the least government can do is to ease the burden of SC order. A cue is available from the stance taken by SC itself in case of unpaid dues from public sector undertakings (PSUs) such as Gas Authority of India (GAIL) etc.
The apex court has objected to DoT raising demand on such PSUs by invoking the principle of ‘including revenue from non-telecom services’ for calculating AGR. If, it considers such inclusion unlawful for the purpose of collecting levies from PSUs, how can it justify the same in case of telecom service providers?
Using this argument, the government may ask the SC to reconsider its decision. If, this does not work, it needs to explore other avenues to give relief to affected companies.