Bringing to a climax more than a decade old court battle between department of telecommunication [DoT] and telecom service providers, in an unprecedented judgment, on October 24, 2019, the Supreme Court [SC] ordered the latter to pay ‘unpaid’ dues towards license fee and spectrum usage charges [SUC]. The unpaid dues [call these additional liabilities] arose consequent to the SC accepting the DoT interpretation that adjusted gross revenue [AGR] [license fee and SUC is charged as percentage of AGR] includes – apart from telecom services revenue – revenue from non-telecom services viz. rent, profit on sale of fixed assets, dividend, interest etc.
The additional liability on private telecom service providers is a whopping about Rs 147,000 crore for the period 2006-07 to 2016-17 [this will further increase after calculations for 2017-18 and 2018-19 – currently under way – are completed]. For three companies viz. Vodafone Idea Limited [VIL] – a joint venture between UK based Vodafone and KM Birla owned Idea Cellular – Bharti Airtel Limited [BAL] and Tata Tele Services Limited [TTSL] alone, the liability comes to Rs 102,000 crore [VIL: Rs 53,000 crore, BAL: Rs 35,000 crore and TTSL: Rs 14,000 crore].
As per the order of apex court, the service providers were required to make the payments within three months from the order date i.e. by January 23, 2020. Instead, they filed modification petition seeking relief especially by way of exemption from payment from interest and penalty and simultaneously, pleaded with the government for granting the same . In a matter concerning compliance with the court order, there was hardly any chance of the latter acceding to the demand. Meanwhile, in a hearing early this month, the SC has rejected the revision petition and directed ‘immediate’ payment.
This has led telecom firms scrambling for funds but thus far has met with little success. The amount paid so far is a little over 10% of the total demand or Rs 15,700 crore [BAL: Rs 10,000 crore; VIL: Rs 3500 crore; TTSL: Rs 2200 crore]. Even as every firm is facing tumultuous moments, the most seriously affected is VIL. At the time of apex court order in October, 2019, Vodafone had opined that ‘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’. Birla Group too had echoed similar view hinting that the company could be taken to insolvency.
Then, the relief sought was by way of (i) exonerating them from payment of interest and penalty on dues [SC order]; (ii) reduction in license fee and SUC [currently, these are charged @ 8% and 3% – 5% of AGR respectively]; (iii) reduction in GST [Goods and Services Tax] from existing 18% to 5% and (iv) moratorium on pending spectrum payments during 2020-21 and 2021-22. Of all these, the government has only allowed (iv) but without altering the overall timeline of clearing all payments by 2030-31.
Considering the magnitude of the unpaid dues, this is not of much help in pulling back VIL from the brink. In its case, the relief from suspension of spectrum payments is about Rs 24,000 crore which is less than half of the additional liability of Rs 53,000 crore on account of the SC order [for BAL, the relief works out to Rs 11,000 crore against liability of Rs 35,000 crore].
Meanwhile, the approval granted by DoT on February 21, 2020 to the merger of telecom tower companies Bharti Infratel and Indus Towers [the merger was announced in April 2018] may help VIL garner about Rs 4,500 crore from its 11.15% stake in Indus Towers [the balance shares in this firm are held by Vodafone Plc: 42%; Bharti Infratel: 42%; US-based private equity fund Providence: 4.85%]. Even after taking credit for this, which itself will take some time to realize, there will still remain a huge uncovered gap of about Rs 25,000 crore.
In the follow up to a spate of meetings the top honchos of VIL and BAL had with the finance minister, Nirmala Sitharaman and information technology minister, R. Prasad, the government is contemplating options that focus on mitigating the cash crunch. It is thinking of creating a fund out of the collection of ‘unpaid dues’ and extending loans there from at low/concessional interest rate. This is bizarre. When, the concerned companies are hard pressed to pay, where from the money to give loans [to these very companies] will come?
Given relentless pressure from the SC not to show any leniency whatsoever in ensuring compliance with the order and unwillingness of any of the promoters to infuse funds [albeit as equity], it seems VIL may end up in liquidation – as already alluded to by both last year. The consequences will be grave in terms of erosion in asset value, loss of jobs [including in firms which do business with VIL] and increase in non-performing assets [NPAs] of banks. The bigger damage will be by way of only two players viz. Reliance Jio [RJio] and BAL left in the market place which is bad omen for ensuring fair competition and reasonable tariff chargeable from consumers.
All stakeholders are responsible for present turmoil in the telecom sector. First, the service providers who contested the demand raised by DoT and went through the court proceedings for over a decade ought to have factored in a ‘negative’ outcome and made contingency provision [this is what commercial prudence requires]. This was not done. Had they done it, today they would not have been in dire financial straits. VIL and BAL also lagged behind in embracing new technologies even as RJio latched on to 4G thereby helping it reduce cost and get competitive edge over them.
Second, the sector regulator viz. Telecom Regulatory Authority of India [TRAI] abdicated its responsibility by not making corrective intervention when it was needed the most. The then new player RJio was indulging in predatory pricing from the day of launching its service in September 2016. The TRAI 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.
The amended order was ‘one-sided’ and ‘discriminatory’ aimed at favoring RJio and unfairly targeting incumbent players. By the time, that order was set aside by the Telecomm Disputes Settlement Appellate Tribunal [TDSAT] [its verdict was delivered on December 13, 2018], the damage had already been done. Other actions of TRAI such as steep reduction 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 existing 14 paisa per minute to 6 paisa per minute also unfairly added to the woes of incumbent operators.
Third, the government in its zeal to provide pan-India connectivity to cover majority of the poor in every nook and corner allowed RJio to continue with record low tariff of < US$ 1 per GB [this is a fraction of what customers in other countries pay viz. US$30 in Japan; US$18 in Korea; US$15 in UK, China and Germany; US$10 in USA] along with free voice call. It forgot that public interest is not served merely by keeping price low/free. Further, it didn’t realize the impact this would have on the viability of service providers. Indeed, this is precisely what we are seeing today with one of the three leading players [read: VIL] about to go under the hammer.
Fourth, even banks kept on indiscriminately lending to service providers merely on the basis of bloated market valuations [then] ignoring their inherent vulnerabilities. Had the former raised ‘red flag’ at the right moment, the latter would have taken timely corrective steps thereby preventing the situation from reaching flash-point.
Where do we go from here? What is the way forward? Letting VIL close the shop is clearly unacceptable. But, for the promoters to expect the government alone to bail it out is untenable. They need to own their lapses and infuse the required capital [both Vodafone and Birla group have necessary financial muscle to garner Rs 25,000 crore – being the shortfall VIL faces] to come out of this crisis situation. India being a market that is growing exponentially and normalcy with regard to tariff setting returning [in December, 2019, all three major players decided to say good bye to rock bottom tariffs], it makes eminent sense for Vodafone/Birla to stay invested.
With the initiative coming from the promoters themselves, the government can help by staggering payments and lowering license fee and SUC [to which the SC should have no objection]. Further, to prevent repeat of the mayhem seen in the last two years, TRAI should play a role expected from it. The banks too can help by exercising due diligence and raising ‘red flag’ precisely when needed.