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Apex Court Order Sets Back Telecom Industry

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A quarter of a century ago, India’s telecom revolution began with private players entering the cellular phone market. After a series of burn-outs and buy-outs, the industry looked like consolidating with three major players, viz., Idea-Vodafone, Bharti Airtel and Reliance Jio cornering 90% of the revenues and wiping out state-owned players almost completely from the market.

Just when the country was hoping that these big entities, some with deep pockets, would clean up their books and start making consistent profits comes the body blow in the form of Supreme Court’s directive upholding the Department of Telecommunications (DoT)’s decades-long claim over recovering license fee and spectrum-usage charge (SUC) from operators.

Verdict Explained

First, let’s take a look at last week’s when SC issued an order asking telecom companies to shell out massive amounts in fees. Ruling in favor of the Department of Telecommunications (DoT), the judges said that all revenue accruing to telecom operators would be included on what is called total adjusted gross revenue (AGR).

The problem is the bigger dispute over the definition of AGR between the DoT and telecom companies that dates back to 2005. What made matters worse is that operators didn’t pay licence fee and spectrum-usage charges on the AGR. For example, when a customer buys talk-time of Rs. 100 from a shop, the shopkeeper gets a commission of Rs. 5. Operators often showed only Rs. 95 as revenue, instead of Rs. 100. Even revenues gained from termination fees and roaming charges would be included in AGR. The Court now ruled that gains from sale of capital assets and insurance claims by telecom companies will not be a part of it.

India charges these companies an amount that is a percentage of their revenues—for the licence they own and spectrum these companies have (now mostly in auctions since the 2G scam). A bigger blow is that the principal amount is 25% of the total impact; the remaining is interest and penalty, but the SC order mandates companies to now pay all three components—principal, interest and penalty – which is financially extremely burdensome for the telcos.

So, now it stands that the two telecom companies, Bharti Airtel and Vodafone Idea, have to shell out as much as Rs 92,000 crore, the fees, which SC claimed is basically the amount that would have been available for the welfare of India’s citizens, who effectively own the country’s natural resources, if operators had paid their dues on time.

Sunrise to Dusk

Now let’s reel back to a decade when telecom was India’s sunrise sector. Many of us would recall how Sunil Mittal’s Airtel created history when in April 2012, the first commercial rollout of its 4G services happened in Kolkata through dongles and modems using TD-LTE technology, which followed by launches in several other cities.

According to London-based telecom trade body GSMA, the telecom sector accounted for 6.5% of India’s GDP in 2015, or about Rs 9 lakh crore (US$130 billion), and supported direct employment for 2.2 million people in the country. GSMA estimates that Indian telecom will contribute Rs.14.5 lakh crore (US$210 billion) to the economy and support 3 million direct jobs and 2 million indirect jobs by 2020.

In September 2016, Vodafone Idea (earlier Vodafone India) received Rs 47,700 crore of equity infusion from its British parent, Vodafone Group Plc, to help it buy more spectrum, invest in infrastructure and reduce debt. The investment was done just before the aggressive launch of Reliance Jio (RJio).

Then entered Reliance Infocomm, through its offering Reliance Jio and it completely disrupted the telecom sector, which was already reeling under the combined impact of a brutal price war between the incumbents, Airtel, Vodafone, Idea, and Aircel. But Jio intensified the competition.

In fact, the Mukesh Ambani-owned Reliance Jio has completely changed the game with its offering of free voice and discounted data packs along with its bouquet of services on voice and data. It also offered handsets as part of “bundled services” wherein users can have the device as well as the service.

Read more: Jio Tops 4G Availability In India, Shows Study

On the contrary, India’s largest telecom entity Airtel and its promoter Mittal had to succumb to regulatory and judicial mechanism which has systematically led to the erosion of both wealth and value.

In the last seven years since India’s first 3G launch, most companies have either collapsed or merged (Vodafone merged with Idea Cellular) to stay afloat, bank NPAs shot up and there has been large scale loss of employment. Sadly, few of the sector’s promises have been met – leaving the two leading telcos, Bharti Airtel and Vodafone Idea in dire strait, with pending licence fees and spectrum usage charges dues of Rs 41,000 crore and over Rs 39,000 crore, respectively.

Vodafone Idea would clearly be the most affected by the SC order because of its weaker balance sheet and may find it very difficult to pay Rs 28,308 crore as licence fees (plus spectrum charges when order is pronounced).

The telecom company expressed its disappointment over the Supreme Court’s judgment on the AGR case. “The judgment has significantly damaging implications for India’s telecom industry, which is already reeling under huge financial stress and is left with only four operators,” it said in a statement.

Vodafone Idea said it may file a review petition, and urged the government to find ways to mitigate stress on the telecom industry. “We will study the ruling as soon as it is available, along with our legal advisers, to determine next steps. If there are technical or procedural grounds for doing so, this could include a Review Application,” it said.

“Significant investment of several billion dollars has been made in creating world class networks. Today’s order has huge impact on two private operators while most of the other impacted operators have exited the sector. We urgently request that the government engage on this matter in order to find ways to mitigate the financial stress for the industry,” VIL added.

The dues have to be borne by not just private telcos, but also beleaguered state run PSUs, Bharat Sanchar Nigam (BSNL) and Mahanagar Telephone Nigam (MTNL)—Rs 21,000 crore for BSNL and Rs 2,537 crore for MTNL for licence fees, as of now. However, the latter two are on life support with the government announcing and are in a revival mode, as per government statement.

It also needs to be mentioned that Reliance Jio also has high debt but its parent company, Reliance Industries, underwent one of the largest capital expenditure exercise by an Indian corporate. Of the $93 billion invested in different verticals, nearly half was invested in Jio.

Bleak Future?

While both Airtel and Vodafone appealed to the government for a rethink, the fact remains that both companies are caught up in a mess.

As of now (and in the near future) the future is bleak. What is needed is a roadmap to recovery. Experts believe, the government levies in India are among the highest in the world and unless rationalized which is causing too much damage to Indian telecom.

Cellular Operators Association of India (COAI), the apex industry body, describes the current situation as “disruptive”. “Taxes and levies in the sector, ranging from 29% to 32%, are one of the highest globally. The judgment is the last straw in contributing to financial distress and it remains to be seen whether the industry will be able to recover,” Rajan S Mathews, DG of COAI said. In addition, he believes, the mindset of prohibitively expensive spectrum (post the 2G scam), which has further impacted the sector’s profitability and growth.

The final question arises, now what does this mean for Indian telecom at a time when we aspire to be 5G enabled? It means we are in for tough times. Although between the two, Airtel will be able to cope with this crisis better due to a larger balance sheet, will it have the money to invest in a 5G auction as planned?

While Telecom Minister Ravi Shankar Prasad is hopeful the government will try to conduct the 5G auctions in the present financial year itself, question is whether these will be a success, considering the sector’s health is in serious danger. If companies suffer, so does the government—with its annual fees and surcharges reducing.

As Prashant Singhal, telecom sector leader at Ernst & Young India, argued in a recent article that SC’s ruling’s impact will be widespread, and the government’s Digital India and 5G auctions plans could be jeopardized. “It’s a disaster, and will have a larger impact on telecom value chain. The sector is stressed, and the stress will increase even more. How will 5G happen, and who will have money to invest?”

The future is uncertain for the telcos, forget 5G which may just be a distant dream. The only solace is that a government panel will examine the problems faced by telecom operators and suggest ways to revive their financial health, amid plunging industry revenues and mounting debt.

The need of the hour is to address the fundamental anomalies that exist in the country’s telecom sector. Or else India’s telecom dreams will be lost and gone forever!

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