The turmoil in telecommunications

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Ten years after Indian telecommunications was shaken by the 2G spectrum fraud and the Supreme Court canceled 122 licenses granted by the UPA government in 2008, the sector is experiencing another upheaval. This time, the Apex court intervened to ensure that the telecommunications companies Bharti Airtel, Vodafone Idea and Tata Teleservices paid more than 1 billion rupees in revenue on the government debt they received in return for the acquisition of licenses and frequencies , The three companies are generally referred to as "established" companies because the other large operator, Reliance Jio, only came on the market in 2016. According to the Department of Telecommunications (DoT), which issues the licenses, the three established companies owe the government Rs 35,600 crore, Rs 53,038 crore and approximately Rs 14,000 crore.

On February 17, three days after the Supreme Court arrested telecommunications companies for failing to comply with their January 16 ruling on the payment of the charges, Vodafone Idea made a partial payment of Rupees 2,500 to the DoT with an assurance that it would pay an additional Rupees 1,000 until February 21. Bharti Airtel said he paid 10,000 rupees to the DoT while Tata Teleservices paid 2,197 rupees.

While telecommunications companies have asked for relief from the high payments, Vodafone Idea's case is particularly complicated as the court rejects its request to instruct the DoT not to use the company's bank guarantees – allegedly around 2,500 rupees – for fees collect. "I hope that the government has common sense that banks will pay when they redeem the guarantees, but the company will go under," Mukul Rohatgi, lawyer at Vodafone Idea, told a television broadcaster.

Industry observers say that if Vodafone Idea is shut down, the consequences will be drastic. "It will be a terrible thing for the economy, the banking system, the telecommunications industry and their customers, suppliers and digital partners," said a telecommunications official for anonymity. "Unlike airlines, where the breach of supply caused by the closure of Jet Airways, for example, could be filled in by other actors, telecommunications capacity, including the enormous physical infrastructure, cannot be replaced. In such cases, the executive should exercise its powers and come in to save the operator. "

The industry expects the government to adhere to an extended moratorium on making payments, redefining adjusted gross income (AGR), or even waiving interest and penalties, and adhering to the principal amount to be paid. The incumbents and the DoT have been involved in a legal dispute for around 15 years. The crisis points to political ambiguities that not only create confusion but also leave gaps for telecommunications companies. The government's dealings with the telecommunications sector have also been questioned. In an industry where there was only one sunrise, players other than Reliance Jio are now struggling to survive. Everything threatens to end in a duopoly that could cause tariffs to skyrocket.

Faulty story

The telecommunications sector was liberalized as part of the 1994 National Telecommunications Policy and paved the way for private players to enter. Licenses in various categories were issued for a fixed fee, allowing a company to offer both wireless and wired services. Licenses to Internet Service Providers (ISPs); and licenses to provide passive infrastructures such as towers and fiber optics. In 1999, the NDA government gave licensees the opportunity to switch to the revenue sharing fee model.

According to the model, telecommunications operators should share a percentage of their AGR with the government as an annual license fee and frequency usage fee. The license fee was tied to 8 percent of the AGR, while the frequency usage fees were set at 3 to 5 percent. In accordance with Section 19.1 of the draft license agreement, gross income included installation fees, income from interest, dividends, value-added services, etc. Calculated on this basis, AGR excluded certain fees, such as: B. Interconnection Usage Charge (IUC) and roaming revenue, which are passed on to other operators.

While the DoT states that it follows the definition of AGR according to the license agreement, industry sources claim that the definition of AGR in the license terms has been revised with regard to the applicable rates for license fees and frequency usage fees. While operators wanted to be burdened based on their core business using the assigned spectrum, the DoT said that the definition of AGR includes other items such as dividends, interest, capital gains from the sale of assets and securities, as well as gains from abroad including exchange rate fluctuations. In 2001, the Association of Basic Telecommunications Operators submitted to the government that non-operating income should not be taken into account when calculating AGR. In the years 2002-2003, however, the DoT asked for a share in the turnover according to the draft license agreement, whereupon the operators turned to the Telecom Disputes Settlement and Appellate Tribunal (TDSAT).

A lengthy lawsuit ensued. At about the same time, the telecommunications companies stopped paying their share of sales for the controversial part of AGR. The operators argued that taxes and duties in India are among the highest in the world, and appealed to the government not to push for the payment of EGR-based fees. The industry claims to pay the government 30 rupees for every 100 rupees in taxes and duties. The GST is 18 percent, and the industry has demanded that the license fee be reduced to 3 percent and the Universal Service Obligation Fund (USOF) fee from the current 5 percent to 3 percent. USOF was founded in 2002 to expand the Internet and mobile connectivity in rural areas. In August 2019, the Cellular Operators Association of India (COAI) claimed that half of the funds raised by USOF between 2002-03 and 2018-19 were not used.

In 2015, TDSAT decided that the AGR encompasses all income with the exception of capital and non-core sources. On October 24, 2019, the Supreme Court overturned this order and confirmed the definition of AGR by the DoT. The incumbents contacted the court for review, but the plea was dismissed on January 16 this year. However, on January 21, the Supreme Court agreed to accept a reason for change submitted by the telecommunications companies to negotiate a “sustainable payment plan”. This followed the decision of the Union Cabinet of November 20, 2019 that telecommunications companies receive a two-year payment moratorium.

On February 14 of this year, however, the Supreme Court hit the telecommunications companies for unpaid fees and warned of contempt if they didn't pay by March 17. "The companies violated the core and content of the order issued by this court," he told the court. "Despite the rejection of the review request, they have not yet deposited anything." Following the Supreme Court rap, the DoT urged telecommunications companies to pay the EGR fees by the end of the day on February 14.

The originally controversial amount has reportedly risen from around 23,000 rupees to the current figure of almost 1.5 billion rupees, as the DoT claimed that all fees accumulated in the past 15 years have been paid with interest and penalties.

The Supreme Court found that telecommunications companies benefited immensely from the DoT formula for EGR calculation. In its decision of October 24, 2019, the court said the "revenue sharing package has proven to be very beneficial to telecommunications service providers as a result of the continued increase in gross revenue". The gross revenues of telecommunications service providers in 2004 amounted to 4,855 billion rupees, in 2007 to 89,108 billion rupees and in 2015 reached 2.37,676 billion rupees, the court said.

SIGNALS ROTATE RED

"The industry is fluctuating from the Supreme Court's decision on AGR. It has further exacerbated the already precarious financial situation of operators," said Rajan Mathews, COAI general manager. "The ball is now firmly anchored in the government's court to resolve the annoying EGR problem by either eliminating it entirely, or redefining it according to the recommendations of the Indian regulator for telecommunications and industry, and lowering the license fee and frequency usage. We believe that EGR is an anachronism on a day that operators have paid in advance for frequencies and licenses. "

Reliance Jio has been TRAI's largest telecommunications provider with 369 million mobile subscribers since January, followed by Vodafone Idea (336 million) and Bharti Airtel (327 million). "The growth in Jio's subscriber base is largely at the expense of the decline in Vodafone Idea's subscriber base," said a report by India Ratings & Research. While a spokesman for Vodafone Idea refused to comment, company sources said the board had assessed that the company could immediately pay 3,500 rupees, of which 2,500 rupees were paid on February 17. Vodafone Idea's assessment of its fees to the government is "significantly" different from the government's claim, the company said, "if the fee is paid in part, the company can dive into its cash reserves without affecting the need for working capital." Indian subsidiary asking parent company Vodafone Plc to contribute 8,000 rupees, the source said, and the proposed sale of Indus Towers, a telecommunications infrastructure company sponsored by the Bharti Group and Vodafone Group, would also help.

Graphics by Tanmoy Chakraborty

In a letter to member (finance) on February 17, DoT, Bharti Airtel, Vidyut Gulati, said that out of the 10,000 rupees paid, 9,500 rupees were on behalf of Bharti Airtel and 500 rupees on behalf of his subsidiary Bharti Hexacom. "We are in the process of completing the self-assessment quickly, and will properly pay the balance after it is completed before the next Supreme Court hearing," the letter that India saw today said. While a spokesman for Bharti Airtel declined to comment on the EGR issue, an email sent to Tata Teleservices remained unanswered until press time.

The Supreme Court directive of October 2019 hit the incumbent telecommunications companies hard. The losses since the beginning of the year for Vodafone Idea, Bharti Airtel and Tata Teleservices in the 2019-20 financial year amount to 62,233.8 billion rupees, 26,946 billion rupees and 2,840 billion rupees, respectively. Between 2007 and 2012, Vodafone Plc has already spent over $ 17 billion (approximately 1.2 billion rupees) to buy Hutch and Essar's stake in Vodafone Essar and invested several billion US dollars more to acquire spectrum and build infrastructure. Effective December 1, 2019, Reliance Jio, Vodafone Idea and Bharti Airtel announced tariff increases for the first time in five years. According to India Ratings & Research: & # 39; Average revenue per user (ARPU) reported by telecommunications companies has shown the first signs of recovery in the past two to three quarters. The recent tariff increases are likely to support the rise in ARPU in the coming quarters. & # 39;

Even if Vodafone Idea overcomes the EGR crisis in the long term by delaying annual payments, for example, Vodafone is vulnerable to incremental regulatory changes due to its weak balance sheet, according to the SBI Caps note. In a three player market, this could be a reason for TRAI to get involved. "But the moment Indian telecommunications forms a duopoly, the regulator can begin to perceive telecommunications differently." Price increases, pricing power, frequency prices – all of this could lead to the regulator taking a tougher stance, ”the statement said. While some analysts predict a Reliance Jio-Bharti Airtel duopoly and higher tariffs, Vodafone Idea tries to stay in the fight. "There is hope for some relief with staggered payments [of dues]"A company official says. But the options for British telecommunications that had come to India seem to be running out and relying on their high growth potential.