Vodafone Idea Limited [VIL] – a joint venture [JV] between UK based multinational Vodafone and Kumar Mangalam Birla owned Idea Cellular – and Bharti Airtel have reported a staggering loss of Rs 51,000 crore and Rs 23,000 crore respectively for the second quarter of current financial year ending September 30, 2019. This is primarily due to a recent order of the Supreme Court [SC] directing telecom companies to pay ‘unpaid’ dues to the Government of India [GOI] towards license fee and spectrum usage charges [SUC].
The order is the culmination of a long-drawn court battle between the department of telecommunication [DoT] and service providers with the former insisting that for determining the license fee and SUC charged as a percentage of adjusted gross revenue [AGR] [@ 8% and 3% – 6%], apart from telecom services revenue, AGR should also include revenue from non-telecom services such as rent, profit on sale of fixed assets, dividend, interest etc, the latter opposed it. The SC has upheld DoT view.
The logical consequence of this is that service providers will now have to pay the difference between the amount already paid using AGR based on telecom services revenue only and amount based on inclusion of revenue from non-telecom services besides telecom services revenue. In addition, they have to pay interest on this amount plus penalty and interest on the penalty. All put together, the unpaid dues work out to about Rs 41,000 crore in case of VIL and Rs 28,000 crore for Airtel.
Given the debilitating effect of SC order on its finances, Vodafone has 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 has said that ‘it won’t infuse any fresh equity and let it opt for insolvency if the government does not provide any substantial relief. Airtel too is on the brink.
VIL has a customer base of 320 million whereas Airtel has 265 million subscribers. Put together, they account for nearly 50% of the total. If, these two companies go into liquidation, this could have catastrophic implications not just for the banks who have an exposure of over Rs 200,000 crore to the duo but also for 585 million subscribers who will be left high and dry.
The service providers are looking to the government for relief by way of reduction in license fee and SUC, suspension of spectrum payments for two years, exemption from payment of interest and penalty under the SC order, reduction in GST from existing 18% to 5% etc. The government too has promised help and won’t let any company to exit. However, before thinking through measures, we need to ascertain as to how the sector landed in its current morass.
In September 2016, in a bizarre move rarely seen before, Greenfield 4G operator viz. Reliance Jio [RJ] entered the Indian telecom market with ‘free’ and ‘unlimited’ voice calls and low-cost data. After launching an 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.
For a conglomerate [read: RJ] investing hundreds of thousands crores in laying infrastructure, an attempt to sell services virtually for free was a brazen case of ‘predatory’ pricing with the sole intent to snatch customers from incumbent players. The latter were forced to reduce their tariff drastically to match the former. 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$15 in UK, China and Germany; US$10 in USA].
As a consequence, incumbent operators who were making profits prior to RJ’s entry are incurring loss. Several operators downed shutters while others were bought over [e.g. Tata Teleservices was acquired by Bharti Airtel]. Today, there are only three private operators viz. VIL, RJ and Airtel down from about a dozen earlier.
When, predatory pricing happens, it is for the sector regulator viz. Telecom Regulatory Authority of India [TRAI] to intervene. 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 whose sole purpose was not only to let RJ continue with its actions but also shield it against any counteractive action by incumbent operators.
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. Further, AVC is defined as the cost that is calculated by identifying those expenses, which change with output, adding them and then dividing the result with total number of units produced.
The very act of selling a product or service below the variable cost of producing it would lead to loss on every unit produced and sold. This will add up to huge loss on total units sold [add to this, the cost of loan repayment and interest cost, the loss would be much more]. Yet, if an operator is selling at below AVC, it is abundantly clear that he is doing predatory pricing with the sole aim of eliminating competitors. To that extent, the TRAI was right.
But, the problem arose when it drew an arbitrary line arguing that by selling at less than AVC, an operator with less than 30% market share will not be scuttling competition whereas a similar action by an operator with market share higher than 30% will tantamount to predatory pricing. This was ‘one-sided’ and ‘discriminatory’ aimed at favoring RJ which then had market share less than 30% and unfairly targeting incumbent players whose share was higher than 30%.
The TRAI order was challenged – rightly so by incumbent operators – before the Telecomm Dispute Settlement Appellate Tribunal [TDSAT]. In its order on February 1, 2018, the TDSAT directed the regulator ‘to issue suitable direction/order regarding benchmark/guideline that can be applied for ascertaining consistency with the principle of non-predation’. This was of no help in reining in the juggernaut [read: RJ]. Meanwhile, even the Competition Commission of India [CCI] held that this was not a case of predatory pricing.
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 existing 14 paisa per minute to 6 paisa per minute also impacted the incumbent operators. This drastically reduced their revenue from IUC even as RJ was increasing its market share by leaps and bounds [courtesy, free voice calls]. TRAI has also prescribed adopting the ‘Bill and Keep’ [BAK] regime from January 1, 2020, thereby reducing the IUC to zero.
The only reason [unsaid] behind the powers that be letting RJ continue with its annihilation of incumbent operators may have something to do with Modi’s grandiose plans for pan-India broadband connectivity. Low tariff [even free service] which RJ has promised helps increase in coverage especially majority of the poor. But, what it ignores is that public interest is not served merely by keeping price low/free. Providing services on a ‘sustainable’ basis and maintaining ‘quality’ is no less important. If, financial health of companies is in dire straits, how will they be able to ensure this?
The crisis in the telecom sector is primarily due to an obsession with services at throwaway price or even free. This won’t go away even if the incumbent operators get the requested reliefs [including exemption from interest and penalty under SC order]. The only way forward is to get rid of the ‘freebies’ cult. Even the government can’t sustain it in the context of food. How can private firms ensure it? True, RJ has done it for three years. But, to expect that it will continue with freebies ad infinitum, sounds like living in fools’ paradise.