The Govt has put a moratorium on pending spectrum payments for telecoms without altering the overall timeline of clearing all dues by 2030-31. But, given the huge amount to be paid, this won't be of much help
Vodafone Idea Limited (VIL) — a joint venture between UK-based Vodafone and KM Birla-owned Idea Cellular — and Bharti Airtel have reported a staggering loss of Rs 51,000 crore and Rs 23,000 crore respectively for the second quarter of the current financial year ending September 30, 2019. This is primarily due to a recent order of the Supreme Court (SC) directing telecom companies to give “unpaid” dues towards licence fee and spectrum usage charges (SUC).
The order is the culmination of a long-drawn court battle between the Department of Telecommunication (DoT) and service providers. While the former insisted that for determining the licence fee and SUC — which is charged as a percentage of adjusted gross revenue (AGR) (at eight per cent and three-five per cent respectively), apart from telecom services revenue — AGR should also include revenue from non-telecom services viz. rent, profit on sale of fixed assets, dividend, interest and so on, the latter opposed it. The SC upheld the DoT’s view.
As a result, service providers will now have to pay excess of the amount calculated on the basis of total revenue i.e. from telecom services plus non-telecom activities over the amount already paid based on revenue from telecom services only. Together with interest on excess amount, plus penalty, interest on penalty, this would be Rs 53,000 crore for VIL and Rs 36,000 crore for Airtel.
However, with a view to avert the crisis for the telecoms, the Government has put a moratorium on pending spectrum payments during 2020-21 and 2021-22 (without altering the overall timeline of clearing all payments by 2030-31). But, considering the magnitude of the unpaid dues (as per the SC’s order), this won't be of much help. For instance, in case of VIL, against total liability of Rs 53,000 crore, the relief from suspension of spectrum payments is only Rs 24,000 crore. In the case of Airtel, the quantum of relief works out to Rs 11,000 crore against a liability of Rs 36,000 crore. The Government has also alluded to exonerating them from payment of interest and penalty on dues as per the apex court’s order but that is no consolation as this would be available only when the SC allows it, which is unlikely.
So, the three big firms are staring at a bleak future. Vodafone has opined that “the future of the Indian JV is in doubt and we won’t be infusing any further equity into the venture.” The Birla Group too, has echoed similar views, hinting that the company could be taken to insolvency. Bharti Airtel, too, is on the brink.
VIL has a customer base of 320 million whereas Bharti Airtel has 265 million. At 585 million, they account for nearly 50 per cent of the total subscribers in India. If, these two companies go into liquidation, this could have catastrophic implications, not just for banks who have an exposure of over Rs 200,000 crore to the duo, but also for subscribers, who would be left high and dry.
They are looking to the Government for relief by way of reduction in licence fee and SUC, reduction in Goods and Services Tax (GST) from the existing 18 per cent to five per cent and so on. Even as the Government considers this, it needs to ascertain as to how the sector landed in the current morass.
In September 2016, in a bizarre move rarely seen before, greenfield 4G operator Reliance Jio (RJio) entered the Indian telecom market with “free” and “unlimited” voice calls and low-cost data. After launching an introductory offer for free — both data and voice for six months, from April, 2017, it charged data at a throwaway price of Rs 50 per GB, even as voice calls continued to be free ad infinitum. For a conglomerate (RJio) investing thousands of crores in laying infrastructure, an attempt to sell services virtually for free was a brazen case of “predatory” pricing with the sole intent to snatch customers from incumbent players. The latter were forced to reduce their tariff drastically to match the former. Post-revision, the tariff in India at less than $1 per GB is a fraction of what customers in other countries pay ($30 in Japan; $18 in Korea; $15 in UK, China and Germany and $10 in the USA).
As a result, incumbent operators, who were making profits prior to RJio’s entry, are incurring losses. Several operators downed shutters while others were bought over (e.g. Tata Teleservices was acquired by Bharti Airtel). Today, there are only three private operators viz. VIL, RJio and Airtel, down from a dozen earlier. When, predatory pricing happens, it is for the sector regulator, in this instance the Telecom Regulatory Authority of India (TRAI), to intervene. The TRAI should have nipped the problem in the bud. But it saw nothing wrong and adding insult to injury, in February 2018, it came out with fresh amendments to the Telecom Tariff Order (TTO) to define predatory pricing in a manner so as to give legitimacy to the actions of RJio.
As per the amended order, a tariff is considered predatory if in a relevant market (circle), an operator, who is a significant market player (SMP), offers services at a price that is below its average variable cost (AVC) with a view to reduce competition or eliminate competitors in that relevant market. An operator will be considered SMP if “it controls 30 per cent of the market share or above,” which is calculated on the basis of gross revenue and subscriber market share. Further, AVC is defined as the cost that is calculated by identifying those expenses, which change with output, adding them and then dividing the result with total number of units produced.
Simply put, the regulator prescribed a two-fold criterion for a firm to be a predator. First, it offers services at less than AVC. Second it has market share over 30 per cent. During the relevant period, 2016-18, even as all firms were selling below the AVC, incumbent operators had market share more than 30 per cent (natural as they have been around for over two decades) whereas, RJio had share of less than 30 per cent. So, in the eyes of the regulator, the former were predators even as the latter was not. In other words, a company which started it all (RJio) was termed innocent even as others who suffered due to its onslaught were charged with indulging in predatory pricing and scuttling competition.
The amended order was “one-sided” and “discriminatory”, aimed at favouring RJio and unfairly targetting incumbent players. The order was challenged before the Telecom Disputes Settlement Appellate Tribunal (TDSAT), which set aside TRAI’s order and even observed that it was “non-transparent.” However, by the time TDSAT pronounced its verdict on December 13, 2018, the damage was already done.
Other actions of the TRAI, such as a steep cut in the Interconnect Usage Charge (IUC) (it is a charge the telecom service provider of a caller pays to the telco on whose network the call terminates) in September 2017 from the existing 14 paisa per minute to six paisa per minute also impacted the incumbent operators. This drastically reduced their revenue from IUC even as RJio was increasing its market share by leaps and bounds (courtesy, free voice calls).
TRAI has also prescribed adopting the “Bill and Keep” (BAK) regime from January 1, 2020, thereby reducing the IUC to zero. This will give a further jolt to the incumbent operators. The only reason (unsaid) behind the powers that be letting RJio continue with its bizarre practice may have something to do with Modi’s grandiose plans for pan-India broadband connectivity. Low tariff (even free voice call) which RJio had promised, helped increase coverage, especially for a majority of the poor. But, what it ignores is that public interest is not served merely by keeping price low/free. Providing services on a “sustainable” basis and maintaining “quality” is no less important.
This won’t be possible if, service providers are in dire financial straits. To some extent, incumbent operators are themselves to blame. For instance, they ought to have factored in a negative outcome of court proceedings (these have gone on for over a decade) and made contingency provisions in their books. They have also lagged behind in embracing new technologies (they are still glued to 2G/3G) even as RJio has latched on to 4G. But, at the core of the crisis is the freebies cult, which RJio has implanted and was glossed over by the powers that be. There is urgent need to get rid of this cult.
The initiative has to come from service providers only. Even as VIL and Airtel have decided to raise tariff, RJio’s intent to follow suit is a good sign. TRAI must not abdicate its responsibility. It should promptly order a “floor price” and ensure that no operator sets tariff below it. It should watch out for an act of predation and deal with it sternly.
However, there is no getting away from the fact that the service providers have to set their house in order.
(The writer is a New Delhi-based policy analyst.)
