The turbulence in the telecommunication sector in India refuses to subside. First, it was the mayhem triggered by Reliance Jio (RJio) which in a brazen display of ‘predatory’ pricing offered ‘free’ and ‘unlimited’ voice calls and rock bottom data tariff from the word go (its services were launched in September 2016). This forced incumbent operators viz. to reduce tariff to match RJio pushing majority of them into red. Many downed shutters while others were bought over.
Next was an order of the Supreme Court (SC) on October 24, 2019 directing telecom firms to pay ‘unpaid’ dues towards license fee and spectrum usage charges (SUC). The license fee and SUC is charged as a percentage of service provider’s adjusted gross revenue (AGR) @ 8% and 3% – 5% respectively.
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 license fee and SUC, 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.
As a result, the service providers were required to pay excess amount which works out to Vodafone Idea Limited (VIL): Rs 53,000 crore; Bharti Airtel: Rs 36,000 crore, Reliance Communication (RCom): Rs 25,000 crore, Aircel: Rs 12,500 crore, Videocon Telecom: Rs 1350 crore, Reliance Jio (RJio): Rs 13 crore and so on. Except RJio on whom the additional liability is miniscule, this has imparted a crippling blow to others. While, RCom, Videocon Telecom and Aircel have gone under bankruptcy, VIL is on the brink and Airtel is struggling to keeps its head above water.
Unable to bear the loss, Vodafone had opined ‘without any government relief, the future of Indian JV was in doubt and the global telco won’t be infusing any further equity into the venture’. The government has not so far come up with any relief say, by way of reduction in license fee, SUC etc. Even if this were to come, that won’t be enough to offset the burden imposed by the SC order. The aggrieved companies have been making efforts with the SC; initially they applied for reconsideration of the order, that was turned down.
Thereafter, they have petitioned for granting relief in making payment (their request is to allow them pay the amount over a period of 20 years; in this, they have also got the support of DoT). This too has not found favor with the top court.
The SC order has thrown up yet another daunting challenge. This has to do with the AGR dues of service providers who have gone bankrupt and put up their spectrum for sale in the insolvency process currently going on under the Insolvency and Bankruptcy Code (IBC). To get to the bottom of this conundrum, let us look at some basics regarding the spectrum.
The spectrum (an acronym for radio waves through which communications happen) is a natural resource that belongs to the people of India. The government holds it in trust and gives it on lease to telecom companies for a specified period in lieu of payment of usage charges. The latter don’t own the spectrum but have a ‘right to use’. Trading in spectrum or transfer from one firm to another is permitted subject to trading guidelines issued by DoT. The key feature of the guidelines is:-
“The seller shall clear all its dues prior to concluding any agreement for spectrum trading. Thereafter, any dues recoverable up to the effective date of trade shall be the liability of the buyer. The government shall, at its discretion, be entitled to recover the amount, if any, found, recoverable subsequent to the effective date of the trade, which was not known to the parties at the time of the effective date of trade, from the buyer or seller, jointly or severally. The demands, if any, relating to licences of seller, stayed by the court of law, shall be subject to outcome of decision of such litigation”.
It is thus abundantly clear that all dues recoverable must be paid by the seller before he concludes the agreement to transfer the spectrum to the buyer. Any dues coming to knowledge after the effective date of agreement has to be paid by the buyer.
In 2016, Bharti Airtel had bought Aircel’s spectrum in 2300 MHz band and Videocon’s spectrum in 1800 Mhz band through trading. Likewise, during January-March, 2016, RJio had acquired 47.5 MHz spectrum in 800 Mhz band across 13 circles from RCom through trading and is currently being used for 4G services. Additionally, Jio is sharing spectrum with RCom in 15 circles. Thus, it is currently using a total of 58.75 MHz spectrum of RCom in 800 MHz band.
The liability arising on account of the SC order (October 24, 2019) was not there when the above transactions happened. Therefore, the seller (read: Aircel/RCom) could not have paid. Now, that it has arisen and the ‘right of use’ of the spectrum is with the buyer, the obligation to pay is clearly on Bharti Airtel/RJio. If, things are so crystal clear and all that DoT needs to do is to send a notice to these two companies to pay up then where is the problem?
The problem is: it has got mixed up with sale of spectrum under IBC. When, a firm goes bankrupt and its spectrum is sold through this route, banks get first priority over the proceeds rather than the government who as owner of spectrum (leased to firms) is treated as an operational creditor. The issue is pending before a SC bench which is debating ‘whether in the cases of natural resources (read: spectrum in the present context), the government should be considered as an operational creditor or financial’.
If, things move on this trajectory and government is treated as operational creditor, it won’t be able to recover AGR dues. In case, SC treats it as financial creditor then banks who have lent to insolvent firms will suffer. Paradoxically, the entities (Bharti Airtel/RJio) who should actually be paying will go scot free. It is ironical that DoT has not even bothered to send notices demanding payment of AGR dues from any of the parties to trading pact.
The top court needs to change course. It should de-link AGR recovery from the insolvency process. The spectrum of insolvent firms had already been bought by Bharti Airtel/RJio (in 2016); they have the right-to-use and are actually using the spectrum. These firms should be made to pay for AGR dues of Aircel/Rcom. This will also be consistent with the trading guidelines,
The SC also needs to look into as to how AGR burden could be reduced. This is necessary as already from over a dozen prior to RJio’s entry, the number of service providers has plunged to 3 viz. VIL, Airtel besides RJio. Of these, VIL is on the brink even as Airtel is struggling to keep its head above water. A mere 2 operators for a population of 1.35 billion does not augur well for the country. The global experience shows that in markets with fewer operators, tariffs tend to be high. Under a duopoly, the risk of steep increase will remain.
Ideally, we should aim at 6 firms to ensure adequate supply of services and competition. But, for now, the focus should be on ensuring that at least, the existing three service providers should survive.
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 PSUs on the basis of ‘including revenue from non-telecom services’ for calculating AGR. If, it considers such inclusion unlawful for collecting levies from PSUs, how can it justify the same in case of telecom operators?
On the same logic, in case of private firms also, the SC may reconsider its decision to include revenue from non-telecom services for the purpose of determining license fee and SUC. For instance, income from dividend or interest – two important sources of non-telecom revenue – has no direct connection with the core activity (read: telecom services) and may be excluded from the AGR calculation.