Revive to thrive again

Ever since the private sector’s entry in telecom services in 1995, it has been a roller coaster ride for the sector. The country, where one had to wait for twenty years for a telephone connection, soon witnessed a mobile revolution where a connection could be had in a matter of a few hours.

By 2007, mobile telephony had spread deep and wide, covering over 90% of India’s population across all the states. The sector itself became a poster boy of the economic liberalization that India had started in 1992 under the then Prime Minister Narasimha Rao and Finance Minister Dr. Manmohan Singh.

However, all this has not been without moments of agony. The industry got nearly paralyzed by 1999 due to the very high fixed license fees bid in the 1995 and 1996 auctions, which made the industry almost bankrupt.

Credit goes to the then Prime Minister Atal Behari Vajpayee who in 1999 made a bold and landmark policy decision of switching from the licensing regime to a revenue sharing gone and of opening up the sector to more competition, which till then was restricted contractually to two operators per circle. The revenue sharing regime paved the way for massification of mobile telephony as an affordable service.

A series of setbacks

In 2008, a major turbulence hit the industry with the issuance of a large number of new licenses on a ‘first come first serve’ basis. The Supreme Court in 2012 cancelled 122 licenses on the grounds of corruption.

In 2016–17, the entry of Reliance Jio led to a wave of exits and consolidations.

While Reliance Communications (RCom) and Aircel went bankrupt, Videocon folded up. Tatas sold mobile operations to Airtel, and so did Telenor. In the process, multiple high-profile foreign operators and investors exited the India market. These included Etisalat of UAE, NTT Docomo of Japan, Maxis of Malaysia, and Telenor of Norway.

The market share of BSNL/MTNL plummeted to low single digits with serious adverse financial condition despite huge subsidies with respect to spectrum.

As a result of this mayhem, the sector was left with only three private operators—Airtel, Vodafone–Idea, and RJio—in addition to the government-owned operators BSNL and MTNL. The result of all this was that over Rs 15 lakh crore (USD 200 billion) invested in this industry was either permanently lost due to shut downs or remained locked with four remaining players with negative return on capital.

On 24 October 2019, a three-member bench of Supreme Court headed by Justice Arun Mishra held that all companies that had taken licenses from DoT had to pay license fees on revenue from all activities even if they had nothing to do with the licensed activity. These included interest income, dividend income, discounts to customers or to market intermediaries, income from gas business (in case of Gas Authority of India Ltd), income from metro rail services (in case of Delhi Metro Railway Corp.), etc.

The demands as a result of this judgement (commonly known as AGR judgement) could amount to several hundred thousand crores of rupees. The demands on two incumbent private operators Airtel and Vodafone-Idea alone could be a mind boggling Rs 80,000 crore (USD 12 billion). Of this, approximately one-third would be towards penalty and interest on penalty as the honorable court held that penalty was leviable because in their view ‘no bonafide’ dispute existed.

However, TDSAT has repeatedly ruled in favor of operators against which DoT filed appeal before the Supreme Court and that the matter was pending in courts for last 13 years.

The honorable court also ruled that the entire dues needed to be paid by 23 January 2020 and compliance report was to be filed with the Supreme Court.

As I write this, the fate of at least Vodafone-Idea truly hangs in balance. This is not my assessment. This is what Vodafone’s CEO Nick Read and Chairman of Vodafone-Idea and of Aditya Birla Group, Kumar Manglam Birla have openly asserted, going to the extent of stating on public platforms that Vodafone-Idea would hang up if appropriate relief/assistance from government was not forthcoming.

It is widely believed that no one in the Government wants to see Vodafone-Idea fold up and reduce this sector to a duopoly on the private side. However, no concrete action has been taken so far. The ‘Committee of Secretaries’ formed with the view of assessing relief for the sector has already been terminated, after announcing a two-year moratorium for ‘spectrum related payments’ but without tackling the impact of AGR judgement.

As someone who has been a part of this industry since inception in 1995, I can safely say that many other varied reasons and actions, apart from the ones stated above have led to the current precarious condition of this industry. These are:

* Treatment of telecom industry as ‘cash cow’ at every step with frivolous litigation on hyper technical grounds, heavy penalties on flimsy grounds/technical non compliances, very high license fees, GST rates and other levies, etc.

* Artificial scarcity created for spectrum in auctions leading to unrealistic and unfeasible biddings for limited spectrum which was vital for very survival of operators who had already invested huge amounts in networks and operations.

* Unsustainable pricing unleashed by players on an already weak industry.

* Price wars prevalent earlier due to the presence of a large number of operators in the market.

As a result, all four existing operators (three private and MTNL/BSNL) have large negative returns on capital employed and resultant negative return on equity. I would like to reiterate that between these four operators alone approximately Rs 12–13 lakh crore have been invested so far. It is estimated that a few lakh crores invested have vanished altogether along with hundreds of thousands of direct and indirect job losses.

MTNL/BSNL have not even been paying salaries on time.  It is indeed a matter of great sadness and pain that a vital industry like telecom on which the entire ‘Digital India’ dream rides, finds itself in such a pathetic and deplorable state due to actions and inactions of various stakeholders.

Needless to say, the government and the industry together need to find a way out of this impasse. I feel that there is an urgent need to act and do the following:

Steps that can bring relief

AGR case: The government will have to show strong political will to contain the damage caused by the AGR case. At the very least, the following need to be done:

* Waive off penalty and consequent interest thereon.

* Waive off penal interest on dues.

* Charge interest only from the date of AGR judgement (since till then the order of TDSAT was in favor of operators). Interest should be charged only from the date that the appeal against said TDSAT judgement was filed in Supreme Court.

* To allow the resultant amount to be paid in line with payment for spectrum, i.e., over 16 years with two years moratorium by way of equated half yearly installments (including for interest).

Spectrum: Henceforth, in keeping with clear assertion in NDCP 2018 that the aim of the government is not to maximize revenue:

* Government must put all available spectrum in auctions.

* Reserve price should be very low. Let competition decide the right level of bid amounts.

* Immediately abolish ongoing ‘spectrum charges’ as revenue share as one-time charge has been already paid in respect of spectrum bought in auctions.

Tackle the ‘SIN TAX’ syndrome on telecom industry:

* Abolish the Universal Service Obligation (USO) charges, at least until existing over Rs 50,000 crore is validly utilized.

* Reduce GST to levels applicable to ‘critical services.’

* Progressively reduce other duties like custom duty on inputs for telecom industry.

* Implement policy decision in National Digital Communications Policy (NDCP) 2018 to allow license fee paid on input services given to operators to be set off against license fee payable on output services (on the lines of GST).

Amendments to AGR definitions and GST rules

* Immediate correction of definition of AGR for future to have license fee on only revenue from services for which license has been issued by DoT. Industry should agree that this prospective amendment would at no stage be cited in support of any past pending proceedings, which must proceed on merits.

* Clarity with respect to GST rules to allow credit for GST paid on all inputs, capex or opex.

* Allow excess or unutilized GST to be refunded or adjusted against other dues to the government, e.g., license fee, spectrum instalments, income tax, etc.

Out-of-court one-time settlement of all pending disputes between operators and DoT: A highly empowered committee consisting of prominent legal and industry experts should look into all pending issues to first eliminate the ones which in their majority view has no merit at all. For all other issues, possibilities could be explored to settle for principal amount only to be paid in line with spectrum payments in equated half yearly installments (with interest) over 16 years.

The industry and DoT must categorically agree (with legal binding) to accept the decision of such a committee and unconditionally withdraw all proceedings wherever pending. This one action could enable the industry to focus on progress, growth, and quality rather than unproductive, expensive, and uncertain litigations.

Encourage sharing of infrastructure, both passive and active: As enshrined in NDCP 2018, regulation must proactively encourage sharing of infrastructure among operators on a non-discriminatory basis (as in the case of towers), to conserve capital and reduce opex.

In my view, regulation must encourage setting up of ‘netcos’ whereby operators (should they choose) could take capacity from such netcos and become MVNOs, i.e., without owning the networks. This step can be transformational, just like creation of towercos, and could go a long way in ensuring sustainable financial health of the sector. This would also ensure much better ROCE for operators due to an asset light model.

Finally, and most important of all, there is a need to ensure sustainable tariffs.

It is quite clear, as pointed out in reasons for the mess that telecom industry finds itself in, that the operators unfortunately are not capable of maintaining necessary discipline when it comes to tariffs. It is also clear that without sustainable tariffs and resultant ARPUs, no sustainable and lasting solution to ensure financial health of this sector can be found.

The last thing that this industry needs is to regress into another financial crisis because of bad/predatory pricing. In the absence of self-discipline, I suggest the following:

* TRAI must mandate floor pricing, both for units consumed (voice/data) and floor ARPU per customer, keeping global statistics in mind (TRAI is already in the process of consultations on this aspect).

* Other than the floors as above, forbearance must continue (TRAI would of course continue to have the right to intervene in case of misuse or cartelization).

* Ensure transparency in tariffs to ensure compliance with floors laid out.

It is my belief that a sincere effort on part of the government and the operators, along with a strong political will, can rejuvenate this glorious industry in India and enable it to be the catalyst for Digital India and inclusive growth.

Financial health and bankability of the sector would ensure that investments are promptly made in new evolving technologies like 5G (and others to follow) so that India can keep pace with the rest of the world in not just technology adoption but also take a lead in developing applications around such technologies, using our formidable IT capabilities, and also become a major manufacturing hub for such equipment and related devices.

- Akhil Gupta

-- The author is Vice-Chairman, Bharti Enterprises & Executive Chairman, Bharti Infratel.