The telecom industry faces a crisis due to huge AGR dues and longtime dispute. Under such circumstances, there is a high possibility of Vodafone Idea Ltd. to shutdown.
The Dispute
In 1994, the telecom sector was liberalized, and National Telecom Policy 1994 was introduced. Before 1999, the Government charged a fixed fee from the telecom industries. However, the policy was a flop as the revenue received by the operators was less than what was expected. This called for a change in the policy. The Central Government proposed a National Telecom Policy in 1999, which changed the fixed license fee to the revenue-sharing model. This revenue-sharing model is also known as AGR (Adjusted Gross Revenue).
According to National Telecom Policy, 1999, the telecom industry was required to pay a percentage of the revenue as license fee, and spectrum user charges to the Government with effect from August 1, 1999. Yet, the definition of AGR was litigated upon as defined in clause 19.1 in the license agreement. The telecom industry will try to receive maximum profit. The telecom industry provides two kinds of services. Primitively, Telecom Services includes cell data, SMS, phone calls, etc. And, Non-telecom Services such as rent, handset sale, deposit interest, dividend, etc. in the second place. The telecom industry argued that the AGR should include only core telecom services and not the non-telecom services. Hence, in 2005, the COAI (Cellular Operators Association of India) challenged the definition of AGR. In 2015, the TDSAT (Telecom Disputes Settlement and Appellate Tribunal) decided the matter in favour of the telecom industry. As stated by TDSAT, AGR included all receipts except capital receipts and revenue from non-core sources such as rent, profit on the sale of fixed assets, dividend, interest, and miscellaneous income. Nonetheless, the Supreme Court set aside the TDSAT’s order as it was against its jurisdiction. At first, 15 % was fixed as revenue sharing under a license which was reduced to 13% and finally to 8% in 2013, keeping in mind the situation of the telecom industries.
What was the License Fee Agreement?
Clause III of the revenue-sharing model read as, “The license fee as a percentage of gross revenue under the license shall be payable w.e.f 1.8.1999. The Government will take a final decision to charge the quantum of the revenue share as a license fee after obtaining recommendations of the Telecom Regulatory Authority of India (TRAI). Meanwhile, the Government decided to fix 15% of the gross revenue of the Licensee Company excluding the PSTN related call charges paid to DOT/MTNL and service tax collected by the licensee on behalf of the Government from their subscribers. On receipt of TRAI’s recommendation and Government’s final decision, the final adjustment of provisional dues will be affected depending upon the percentage of revenue share, and the definition of revenue for this purpose may be finally decided.”
The Verdict
On October 24, 2019, the Hon’ble Supreme Court, in its judgment, said that the definition of the Adjusted Gross Revenue was “crystal clear”. The Supreme Court upheld the Department of Telecommunications (DoT) and the definition of AGR, which was accepted and signed by the Telecom Service Providers (TSPs). The Supreme Court further ordered the TSPs to make payments for all the outstanding liabilities as per the license agreement, including license fee, Spectrum user surcharge (SUC), penalties, and interest within three months.
The Telecom Industry did not pay even a penny even after the Supreme Court ordered it to do so. A three-judge bench, led by Justice Arun Mishra drew contempt proceedings against the officer of the Department of Telecommunications (DoT). On January 23, 2020, the officer had issued an order to not take any forceful action if the Telecom Industry does not pay the dues within the limited time as directed by the Supreme Court.
Also, the Hon’ble Supreme Court pleaded to show cause as to why the contempt proceedings should not be initiated against the telecom industries as they failed to comply with the order.
Under such circumstances, the Government withdrew its January 23, 2020 order. And, a DoT letter dated February 14, 2020, said: “You are hereby directed to make the payment of outstanding dues of license fee and spectrum usage charges by 11:59 pm of February 14 positively.”
After the Hon’ble Supreme Court judgment in October 2019, a sum of Rs. 4 lakh crore was demanded from PSUs like GAIL, Power Grid Corporation India, Network Rail Telecom, Oil India, and Delhi Metro Rail Corporation. This demand seemed twice or thrice times their average revenue. When this matter was taken into the Supreme Court, Hon’ble Justice Arun Mishra found it to be a misuse of the judgment. Hence, he ordered to withdraw the demand made to PSUs.
Impact of the Hon’ble Supreme Court Verdict
The exact dues were unclear as the estimated dues were litigated upon for a long time, and the percentage of revenue sharing was changed from time to time. Bharti Airtel and Vodafone Idea were the most affected. Vodafone Idea and Bharti Airtel were required to pay approximately Rs. 58,254 crore and Rs. 43,980 crore respectively. Out of which the telcos have paid Rs. 6,854 crore and Rs. 18,000 crore respectively. Other affected telecom industries are Tata Telecom, Rcom, Aircel, Reliance Jio, Telenor India, and more companies that have now exited the telecom market. Reliance Jio was the least affected as it entered the market in 2016. And, Jio was successful in clearing its dues.
The telecom services generate one of the highest revenue-generating sectors. In the present era, Aadhaar, IAM, DBT, and more important services are all connected to the telecom market. The AGR dues judgment was a big blow for the private operators. The payout by the telecom industries might likely lead to windfall gains for the Central Government and close the fiscal deficit gap for the current fiscal year.
What if the Vodafone Idea shutdown in India?
While the AGR dues were litigated upon, Vodafone Idea kept their stand by repeatedly stating that the company would have to shut down if they were to pay such heavy dues. Supposedly, if the company shuts down, it will impact the jobs of people at large. In such a case, it will be a backlash for the banking sector too. A shutdown of Vodafone Idea would mean lakhs of people slashed from jobs, burden for retailers, suppliers, and many people associated with the company. If Vodafone Idea shuts down, it will increase India’s fiscal deficit by around 40 points.
Another serious issue that will arise if Vodafone Idea shuts down will be a private sector duopoly. The major players would be Reliance Jio Infocomm and Bharti Airtel and two state-owned strugglers BSNL and MTNL. However, even the condition of Bharti Airtel does not seem to be very sound with its mounting dues.
Reliance Jio is in a favourable position as it has cleared all its dues and is the one who has brought a change in the telecom industry. An ingress of Reliance Jio in the telecom industry brought low data tariffs and cutthroat competition. Hence, India has the cheapest internet data in the world.
Source: cable.co.uk, forbes.com
While AGR dues are like a cross to bear for Vodafone Idea, the company has not announced or hinted anything in this regard. Instead, the CEO gave voice to the Government that Vodafone wants to make a new, good beginning in India.
Government’s Role
The Hon’ble Supreme Court’s judgment acted as a sudden pressure for the telecom industry. Had the concerned industry made provision in their balance sheets, they would have easily tackled the dues.
More than ten telecom operators have gone to mute in the past ten years. And, if in any case Vodafone Idea shuts down, and a duopoly market prevails, the tariff rates would increase by nearly 25-30%. Hence, consumers will be heavily impacted.
SBI (Rs. 11,000 crores) Induslnd Bank (Rs. 3,500 crores) and IDFC First Bank (Rs. 2,500 crores) are the major lenders of Vodafone Idea Limited. Therefore, if Vodafone Idea shuts down banks will allow facing a major hit. Bankers believe that the Government would take necessary steps to prevent duopoly in the telecom sector and keeping in view the slow-paced economy.
Two aspects of the payment of dues were thought of. A brokerage firm, IIFL Securities threw light on Vodafone Idea and said that the Government would spread the payment of dues over 10-20 years to avoid VIL to exit the Indian market. At the same time, the New Street Research suggested that the Government would not allow any relief to VIL. The Hon’ble Supreme Court considered itself open to the payment of dues over 20 years as proposed by the DoT.
While the developed countries are moving into 5G networks, India’s telecom industry is lacking behind. And, the present situation of telecom industries in India rubs salt in the wound.
Many experts suggest that raising tariffs and policy support can only help the financial condition of the telecom industry. The telecom industry has been continuously demanding the rationalization of levies.
The Modi government’s decision can settle the condition of the telecom industry. The Government’s intervention is the need of the hour for the telecom industry. Probably, the question is whether the “Vivid se Vishwas” scheme will do any good in the future?
The Government will not want Vodafone Idea to shut in India. Let us see if the Government can prevent the telecom industry from turning into a duopoly market.
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