Disaster hits telcos, but this was waiting to happen

(Indian telecom companies owe ₹1.33 lakh crore to the government. Following a Supreme Court verdict in favour of the Department of Telecom or DoT, telcos have no go but to pay up the amount. The telecommunication giants have raised an alarm and rushed to the government seeking some kind of bail-out. The Federal brings you a two-part series examining the issues involved in the 14-year-old case.)

The Q2 or the July-September quarter financial results have dealt a death blow to the Indian telecom sector which is already reeling under heavy cannibalisation at the hands of a new player Reliance Jio. The latest entrant unleashed a tariff war which the older telecom companies have been unable to face.

Bharti Airtel and Vodafone Idea, India’s second- and third-biggest telecom service providers (refer Chart Q2 Revenues), respectively, announced unprecedented losses on November 15th. This extraordinary losses were largely due to a balance-sheet provisioning. Both the operators have huge disputed arrears and dues to be paid to the government following a Supreme Court direction.

For Vodafone Idea, the total losses ballooned to ₹50,922 crore in the three months, from ₹4,874 crore in the year-ago period. Airtel’s figure stood at ₹23,044 crore the biggest in its 24-year history. The company had earned profits of ₹118 crore in the year-ago period.

Reliance Jio has relatively lower dues of ₹13,000 crore since its operations began only in September 2016, as compared to Airtel and Vodafone, which have been around for two decades now.

Reliance Jio’s ₹13,000 crore dues arise from the licence fee and spectrum usage charges owed by Anil Ambani-founded Reliance Communications (RCom) which has shut shop and sold its spectrum and band to elder brother Mukesh Ambani’s empire.

All the dues are a fallout of the Supreme Court verdict dealing with the adjusted gross revenue (AGR) of the companies.

What is AGR?

In addition to the Entry Fee, the government charges the telecom companies an annual licence fee, which has been fixed as a percentage of Adjusted Gross Revenue (AGR). This is paid by the telecom operators as per their service area for each authorised service they provide.

The licence fee has been fixed as 8% of the AGR, inclusive of USO levy which is presently 5% of AGR. In other words, the licence fee payable by telecom operators is a form of ‘revenue share’ paid to the Centre.

According to the DoT, the AGR should incorporate all revenues earned by a telecom company – including from non-telecom sources, such as deposit interests and sale of assets. The telecom companies, however, had been arguing that the AGR should comprise only the revenues generated from telecom services and not the telecom revenues.

The Supreme Court on October 24 upheld the Department of Telecommunications’ (DoT) definition of AGR, ending a decade-long dispute between the government and the telecom industry. This ruling has had major ramifications for the telecom companies, especially for the older service providers, such as Airtel and Vodafone Idea.

The latest petition by the DoT that was being heard in the Supreme Court was one in which department sought interest, penalty and interest on penalty on the outstanding amount. This amounted to ₹92,641 crore (disputed actual demand is ₹23,189 crore, levy of Interest of ₹41,650 crore, penalty of ₹10,923 crore and interest on penalty of ₹16,878 crore).

RCom, owned by Anil Ambani, owed dues of around ₹20,000 crore (₹16,456 crore licence fee and ₹3,533 crore spectrum usage charges). But since the company has filed for bankruptcy, DoT will have to claim the amount in an insolvency court as an operational creditor and may have to take a huge haircut, even if RCom is in any position to pay its dues.

Meanwhile, Jio, as referred earlier, has made a provision of around ₹13,000 crore since it  bought 47.50 MHz spectrum in the 800 MHz band from RCom. The spectrum was acquired across 13 circles and is currently being used by Jio to provide 4G services.

If this amount of around ₹13,000 crore due from RCom is not charged to Jio, the AGR and Spectrum Usage Charge dues of Jio arising from the SC order would be practically negligible.

Jio has been opposing the Cellular Operators Association of India (COAI), which is spearheading a campaign on behalf of the beleaguered telecom companies — Airtel and Vodafone Idea.

COAI has urged DoT to provide some kind of relief from payment of dues, which for the industry as a whole totals to ₹1.33 lakh crore. Of this, around ₹80,000 crore is due from the two incumbent operators — Airtel and Vodafone Idea.

Jio had, however, written letters to telecom minister Ravi Shankar Prasad, stating that the government should not write off any part of the dues, to be realised from these operators.