Lately, we are reading many articles on how the Supreme Court has delivered the coup de grace on a struggling telecom sector by ordering Vodafone-Idea and Bharti Airtel—two leading players who together control two-thirds of the telecom market and cater to 600 million Indian customers—to cough up revenues worth approximately Rs 1.33 trillion as part of AGR dues that the companies were contractually bound, but had so far refused to share with the government.
The telecom operators, after a 14-year legal battle, lost their case at the Supreme Court on 24 October, 2019. The apex court directed the companies to clear their cumulative dues, penalty and interest within three months. All hell has broken loose since then.
The AGR, or adjusted gross revenue, has been a disputed issue since 2003 between the Department of Telecom (DoT) and telecom operators. This dispute arose out of the greed of these operators to deny the public exchequer its due share of the revenues from the use of a finite national/public resource: Spectrum.
Following the new telecom policy of 1999, all telecom operators migrated to the revenue share model from the fixed licence model. This new model was created to lighten the load for the operators and improve business viability. Accordingly, it was determined that the operators would share 15 percent of their AGR with the government every year. After two revisions, the AGR payout now stands at just 8 percent.
But, in 2003 and right until 2019, the operators held up paying a share of the AGR by cleverly inducing legal nuances into the AGR clauses that did not simply exist. They chose to interpret AGR as revenue accruing only from their core operations of voice and data and said they would not pay AGR on any other revenue stream.
The matter went to TDSAT (Telecom Disputes Settlement and Appellate Tribunal) and then to the Supreme Court. As far back as October 2011, the apex court shot down the telecom operators' argument. It ruled that the AGR definition was broad enough to include all revenues and nobody, not even the Telecom Commission or the TDSAT, had the power to rewrite any clauses of the contract. Saying so, it committed the case back to TDSAT.
In 2015, in spite of the Supreme Court's unambiguous judgment, the TDSAT, shockingly, ruled in favour of the operators. This prompted the government to move the Supreme Court, leading to the latest judgment on 24 October.
The Supreme Court once again demolished the argument of telecom service providers (TSPs) and gave an earful to the TDSAT for its finding in favour of the operators whose only purpose is to undercut the exchequer. But the emerging narrative in the media paints the government as a Shylock, out to bully private telecom firms into coughing up money that they are in no position to pay based on the demand that it is unjustified.
One analyst claims that the Narendra Modi government is 'squeezing' the telecom operators but it 'won’t solve govt’s credit and fiscal crises.' Another harped on the same theme, accusing the government of trying to fill a 'budget hole' by 'gouging its wireless carriers'. Yet another warned of massive job cuts following the Supreme Court ruling.
Meanwhile, both telecom operators have called Supreme Court’s decision 'disastrous', warned of ruination to telecom sector, threatened to derail the government’s ‘Digital India’ plan, and through the COAI (Cellular Operators Association of India), sought to pressurise the Union government into announcing a complete waiver of all dues or at least a relief package that involves paying only the principal amount, and that too staggered over a 10-year period after a two-year moratorium. That's audacious considering we are talking about dues already going back to 14 years of devious delay.
The argument of the telecom operators—Vodafone-Idea and Airtel—is that unless the government takes a lenient view, the telecom sector will be destroyed, countless jobs will be lost, consumers will get hurt and the industry will turn into a monopoly; that dart being thrown at Reliance Jio, the newest entrant in the market that has caused massive disruption in the sector.
In other words, after failing to honour their contract for over a decade and exhausting all legal recourse, the telecom operators are now trying to shift the onus of their non-compliance to the government for expecting its dues.
The key questions here are two: One, are the government’s demands legitimate and justifiable? Two, are the companies in such bad shape that they cannot clear the dues despite the Supreme Court asking them to do so? And a related third question, even if for argument’s sake we assume that the government’s demands may break the back of these TSPs, would it deal a crippling blow to the telecom industry?
Before we tackle the questions, it is worth noting the stand taken by Reliance Jio, the third major player in the telecom sector. In fact, Jio is now the second-largest telecom company in India with a customer base of 34.8 crore after market leaders Vodafone-Idea with 37.5 crore. Airtel is third with 32.7 crore (according to the latest official data released by TRAI in October.)
Reliance Jio takes a stand
Jio has taken a stand contrary to Vodafone-Idea and Airtel. It has accused the COAI of ignoring its submissions. In a letter addressed to Union Minister for Telecommunications Ravi Shankar Prasad, Jio has accused the COAI of blackmailing the government, taking a stance that amounts to dishonoring the apex court’s judgement, argued against extension of a relief package to the telecom sector and claimed that the two TSPs have enough resources to meet the demands. Jio has also blamed the COAI for acting at the behest of Vodafone-Idea and Airtel and accused the organisation of turning into a mouthpiece for two operators instead of representing the views of the industry.
Since we now have two sets of arguments, we may scrutinize the validity of respective positions.
It is interesting to note that according to the CAG, six TSPs (Vodafone India, Idea Cellular, Bharti Airtel, Reliance Communications, Aircel and Sistema Shyam) have been consistently under-reporting their revenues to reduce the tax burden.
In a report tabled in Parliament on 21 July 2017, the Comptroller and Auditor General put the total understatement of AGR by six operators at Rs 61,064.56 crore and calculated that this has resulted in a 'short payment' of Rs 7,697.6 crore to the government. The period of audit for five players was from 2010-11 to 2014-15 (Reliance Jio had not begun its operations during that period), while for Sistema Shyam the period under review is from 2010-11 to 2014-15.
We have evidence, therefore, to note that Airtel, Vodafone, and Idea, among others, were underreporting revenues that resulted in a financial loss for the government. It is also worth noting that Airtel, Vodafone, Idea (and later Vodafone-Idea) reportedly failed to declare the disputed amounts under the levy of AGR as “provisions in their books,” an accounting procedure that is binding on them under the Companies (Accounting Standard) Rules, 2015, read with Section 469 of the Companies Act, 2013.
Why is this important?
As a report in Economic Times points out, in 2004, TSPs declared gross revenues of Rs 4,855 crore which, by 2015, shot up to a whopping Rs 2.37 lakh crore. But during this time the AGR levy came down from 15 percent earlier to 13 percent and then 8 percent in 2013. This means that the telecom companies decided to squeeze the finite natural resource dry even while they were making money hand-over-fist. This was pure corporate greed. So their protestations to the government about this 'disaster' coming at an inopportune moment and the doomsday portrayals in the media are highly suspicious.
Even more so because few of these pundits are questioning the operators for failing to make provisions in their annual accounts. They willfully ignored the accounting procedure of declaring the disputed amounts as 'provisions'. In other words, they were not making enough provisions in their books for a legal setback even though the AGR issue remained disputed. This is also insufficient compliance with Accounting Standard Rules.
As mentioned earlier, a key question in the dispute is whether the government’s interpretation of AGR (that includes a levy on revenues from non-core operations) is unjustified. It is worth quoting from the Supreme Court judgment on this.
In the judgement delivered by a Supreme Court Bench led by Justices Arun Mishra, AA Nazeer and MR Shah, the court observed: “The demand was raised for the first time in the year 2003 despite the fact that the definition of gross revenue was clear, and as is apparent from the correspondence and the agreement reached between the parties, there was no doubt what constitutes gross revenue.”
The apex Court then goes on to observe that the challenge to the definition of AGR, “was found to be sans any basis by this Court. The objections raised concerning the validity of the gross revenue, were wholly unsustainable and on the face of it, were liable to be rejected, and came to be rejected finally and conclusively by this Court in the year 2011".
In what may only be construed as a damning indictment, the Supreme Court pulled up the TSPs for their delaying tactics, and observed: “The regime of revenue sharing was extremely beneficial (for licensees) than the previous regime of the fixed licence fee, and they have tremendously benefited by it as is apparent from the statistics of the revenue earned by the licensees under the revenue sharing regime. When Government has parted with the privilege as to revenue on sharing basis under the license, and an agreement entered into, it ought to have been precisely followed. The conduct of the licensees was highly unfair, and anyhow and somehow, they had attempted to delay the payment.”
We now see that the TSPs were making a killing from the revised regime and rates but were ignoring accounting procedures, under-reporting revenues and, as the Supreme Court pointed out, were fully aware of the definition of AGR while going into the contract and attempted to withhold payment as long as they could.
It has been said that the telecom sector is under distress and that the companies are under no position to pay the money. Even if this is true, the argument is specious. If companies engage in bad business behavior, take willfully wrong decisions, fail to comply with rules and contractual obligations or get caught while trying to outsmart the government in paying taxes, then it is only fair that they suffer the consequences of their actions. Playing the victim now is a very convenient position. If these firms are now given a bailout package and financial relief, the government will make an error.
The granting of a financial bailout—that these companies are desperately seeking—will be tantamount to rewarding bad business behavior, incentivising the cooking up of books and under-reporting of revenues and consequently, punishing the honest taxpayer. This creates not only a moral hazard but also a damaging precedent. Any company from any sector may try to pull off a similar stunt.
As far as the health of Vodafone-Idea and Airtel are concerned, there are reasons to believe that the companies have enough resources to meet the dues. Even if we disregard the points put forward by Reliance Jio in its letter to the minister—that the TSPs may monetise their existing assets, raise fresh equity, revenue generated through divestment of profitable telecom assets—both these firms are backed by promoters that have deep enough pockets. All that Singtel—that currently holds 48 percent stake in Bharti Airtel—needs to do is to increase its stake and make Bharti Airtel a foreign-owned entity. Such a move may already be afoot.
Similarly, Vodafone Plc., the UK-based parent company of Vodafone-Idea, has denied rumours that it is planning to exit India and has reiterated its commitment to back the joint venture in “challenging times”.
If these two TSPs have a big enough cushion, the question is why are they painting a doomsday scenario in the telecom industry? It stands to reason that if the telecom operators escape their tax liabilities by appearing to go belly-up, then it is a good enough strategy. Besides, with jobs and slowdown in the economy turning into political issues, the TSPs may find the time opportune in playing to the gallery and forcing the government’s hands. When companies threaten to cut jobs to escape their liability, it may be safe to doubt their intentions.
Finally, even if for argument’s sake we assume that clearing of dues may put the companies in the red, it may only mean a reinforcing of 'creative destruction', the term coined by Joseph Schumpeter to describe how free-market operates, bad businesses die and are replaced by companies that are run more efficiently. This is the raison d'être of a free-market economy.
The unlikely exit of Vodafone-Idea or Airtel—we do not wish that, but are forced to consider it only because the companies themselves are doing so without compunction—may create space for a new and more efficient player in the system that will end up benefitting the consumers.
We have seen that happen in the civil aviation sector in recent years. Kingfisher went bust and then market leader Jet Airways. The business was then redistributed to the other established operators and new ones such as Air Asia and Vistara are spreading their wings.
Why, closer home, the telecom industry itself has seen multiple collapses and mergers. Tata merged with Airtel, Reliance Communications went bust and Vodafone and Idea became Vodafone-Idea without disaster striking the country. That is why there is simply no reason why the government, politically vulnerable due to the slowdown, must give in to the unjust demands of the telecom operators.
(Disclaimer: Reliance Industries Ltd. is the sole beneficiary of Independent Media Trust which controls Network18 Media & Investments Ltd which publishes Firstpost)
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Updated Date: Nov 04, 2019 14:11:16 IST