The telecom industry is caught in barbed and crossed wires yet again. A Supreme Court ruling has put the spotlight firmly on an industry in which warring factions have chosen to engage in a no-holds-barred campaign of ugly proportion against each other. 

The industry – nay Vodafone-Idea and Airtel, to be precise – was rudely rattled when the apex court settled a nearly 15-year-old dispute in favour of the Department of Telecommunications (DoT). 

The dispute related to the Adjusted Gross Revenue (AGR) of mobile operators. This refers to an operator’s total revenues minus permitted exclusions. An operator’s licence fee and spectrum usage charges (SUC) are defined as a percentage of its AGR  and are currently pegged at 8% and 4% respectively. 

The permitted exclusions refer to revenues that an operator passes on to another operator in the form of interconnect usage charges and roaming payments. 

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For a long time, mobile players argued that such exclusions should also include all other revenues unrelated to their telecom business such as income from investments, rents from real estate and so on. The DoT insisted that the licence agreement signed by the operators left little room for this interpretation of AGR. 

Upholding the DoT interpretation, the Supreme Court ordered that the Indian telecom operation had to include non-core revenue too while calculating levies. The verdict ended the drawn-out legal between the mobile operators and the government on the definition of AGR. The DoT had sought from them dues in excess of Rs 92,000 crore. 

While ruling in favour of the DoT, the Supreme Court ordered the operators to pay the government over Rs 1.3 trillion or 1.3 lakh crores, including the original demand, interest and penalty charges.

Centre in a quandary

While the verdict should have pleased the DoT’s mandarins to no end, the reality is that the verdict has put the Centre in a quandary. 

While the industry body COAI has stepped in to bat for operators – more specifically for Vodafone-Idea and Airtel, the two who have been slapped with a huge burden in the light of the Supreme Court verdict, Mukesh Ambani’s Reliance Jio has gone all out against its two principal competitors. 

Nick Read, chief executive officer of Vodafone, in the meanwhile drastically upped the ante recently when he indicated that Vodafone-Idea, the second largest telecom company in India, could head for liquidation unless New Delhi intervened to ease the situation that has arisen in the wake of the Supreme Court verdict. 

In effect, the two aggrieved players want the government to drop its demand on spectrum fees. Given the quantum of money involved, it is simply unrealistic to expect the DoT to give up its claim. Yet, it may not be that easy for the DoT to just enforce the Supreme Court verdict. 

The telecom scene has turned tricky since the operators and DoT landed at court to resolve their dispute over the interpretation of AGR. What has added to the mess is that the sector is also reeling under a massive debt burden and that competition has turned uglier with the entry of Jio into the game. There has been a steep fall in revenue and profitability of incumbents. 

Of the 15 old operators impacted by the apex court order, only two private operators remain operational.

Initially, the service providers paid a fixed licence fee. Subsequently, the government offered a "migration package", giving an option to the licences to migrate from this fixed licence fee to a revenue-sharing fee in 1999. The underlying principle was “Pay as you Earn”. They paid the licence fee and interest till the date of migration i.e. July 31, 1999, and no dues were waived.  

Somewhere down the line, telecom service providers moved the court disputing the terms which resulted in non-payment of the requisite licence fee and spectrum charges to the public exchequer based on agreed “AGR”. As the dispute was on in the legal arena, these operators have expanded in terms of customer acquisition and forayed into adjacent areas of the telecom field. 

Perhaps, they might have even used the “withheld money'” (dues to DoT) for business expansion.

Playing cry baby

What defies comprehension is how can players of such standing now start playing the role of a cry-baby. Had they not been advised by their experts to provide for contingency liabilities in their books of accounts for any adverse ruling by the Supreme Court? Did they believe they would be given a divine reprieve?

Who should pay for their accounting lapses? With a battery of experts on their rolls, these iconic names are supposed to ideally anticipate regulatory, market and business hiccups that come their way. Many a great business house had evaporated into the pages of history in the past precisely for the very same reasons. They went unmourned and unnoticed sans anybody to lobby. 

More often than not, modern-day corporate bigwigs indulge in aggressive marketing tactics and play the volume game. Where size matters, the focus is invariably on valuations. Not surprisingly, promoters of these enterprises have managed to take out substantially their investments by roping in financial partners. The valuation game, orchestrated by a well-entrenched expert chain, is constant fodder for these enterprise drivers. As such, their arguments are unlikely to cut much ice in the eyes of a discerning onlooker. 

Also Read: Why the SC Verdict on Adjusted Gross Revenue Does Not Validate Indian Telecom Licensing Regime

No doubt, this volume game has brought immense benefit to millions of ‘end-clients’ in terms of getting affordable access to telephony. 

There is another side to the story, however. The volume game is largely also facilitated by bank funding. And, there lies a new tale to the story. For one, they are yet to ready their books for the consequences for any adverse ruling by the Supreme Court in this instance. Now, they are crying from roof-tops that this financial demand would sound the death-knell for them. If unbridled competition has had positive fall-out on end-clients, their unhindered resort to debt funds could have indirect consequences on the money of common people in banks.

Seeking concessions after decrying them

Often times India Inc has decried the tendency of governments across the board for dishing out freebies of one kind or the other to common citizens. Political parties have come under intense attack for indulging in vote bank politics by offering these freebies. Strangely enough, India Inc now finds nothing wrong in seeking concessions – nay, freebies – from the government. Earlier, the auto industry had sought duty cut. Now, the telecom units seek a concession of a different kind! 

Are the flat-owners in the Kerala housing project which is ordered to be demolished by the Supreme Court not entitled to compensation? After all, they were done in by the misdeeds of others. 

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The ‘heads I win, tails you lose’ approach is indeed not kosher.

The industry, in general, will be well served if it takes the good, bad and ugly in its strides and moves forward to play a deep and long-haul game. Playing cry baby appears business as usual for them.

For the government, on the other hand, there are no easy answers. Having Vodafone, one of India’s largest foreign investors, exit the country reflects badly on its governance and the broader regulatory system. If this happens, it will turn India's telecom industry into a two-horse race, which comes with its own set of problems. 

K.T. Jagannathan is a senior business journalist.

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