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Telecom operators have regrettably sullied their reputations in the interest of short-term gains

When the Supreme Court adjudicated on the definition of adjusted gross revenue, it was in no mood to give the benefit of doubt to telecom operators, even for legitimate reasons.

Written by Rajat Kathuria , Chavi Asrani |
Updated: February 13, 2020 11:07:46 am
Missed call Since the New Telecom Policy of 1999 (NTP 1999), operators were required to pay a percentage of their AGR to the government as licence fees. (Illustration by C R Sasikumar)

As the dust settles after the Union budget and the Supreme Court’s decision to not provide relief to telcos from their licence fee liabilities, it is an appropriate moment to step back and examine how we got here.

At the centre of the current storm is the definition of adjusted gross revenue (AGR). What constitutes AGR is important for the purpose of computing licence fee and thousands of crore are dependent on this. Since the New Telecom Policy of 1999 (NTP 1999), operators were required to pay a percentage of their AGR to the government as licence fees. This was done in exchange for moving operators from fixed licence fee — based on irrationally exuberant bids they had made in the mid-nineties — to a regime that determined licence fee based on revenue earned, thereby de-risking the obligation. India celebrated the migration package and the rest of the world looked towards India to resolve their own woes with exuberant bidders. Alas, what was nectar for the sector in 1999 has turned into poison.

We try and understand the reasons for the mess and why the Supreme Court decided the matter in favour of the government even though there were signals in the run-up to the verdict that it might waive the accumulated interest and penalty on the unpaid licence fee — as per some estimates 75 per cent of the AGR dues are on account of penalties, interest and interest on penalties. In the Union Budget 2020, the finance minister has indeed waived penalty and interest charges on disputed tax liabilities if these are paid by March 2020. A similar offer could have been made to embattled telcos. Sadly, it was not.

It is facile to make the argument that the Court sided with the government because the latter is strapped for resources since economic growth, spectrum auctions, disinvestment and tax revenues have all flattered to deceive. At the same time, it is pertinent to ask whether the decision will hasten the decline of the beleaguered sector and in the process irreversibly cripple the goose that laid golden eggs. Should the Court have been worried about saving the sector? After all, it is there to interpret matters of law and fairness and is not a substitute for executive action or lack thereof.

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Resolving what constitutes AGR is a matter of fairness. Should non-telecom revenues be treated as revenue under the license? Has anyone stopped to wonder why bundling — a pervasive phenomenon in most telecom markets — has not taken off in India? The fear is that handset sales will also come under the purview of AGR. Handsets, it could still be argued are part of the service offering. But, now, interest and dividend earnings on investments have also been included in AGR.

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Court decisions do not happen in a vacuum and are often informed by the local context and are endogenous to the operating culture. Ever since private entry was allowed in the sector, it has been peppered with controversy and litigation. The creation of the telecom regulator itself lies in the non-transparent bidding process of 1995. Among the transparency-related issues was a post-bid decision by the department of telecommunications (DoT) to impose a cap on the number of licences that could be awarded to one bidder. The rules were changed ex-post and smacked of bias. Inevitably, litigation followed that has become the norm for the sector.

The fateful start in telecom proved a bad omen. Litigation has been relentless, matched only by the increasing capital requirements due to the frequent introduction of new generation technologies. While India struggles somewhere in between 2G and 4G, some markets are beginning to test the 6th generation. Fed up with incessant litigation and confrontation, the government dissolved TRAI in 2000, and assigned its quasi-judicial powers to a telecom disputes tribunal to fast track settlements and bypass overcrowded courts. Whether this has happened is another story.

In 2003, “limited” mobility service was converted into a fully mobile service with a one-time payment of Rs 1,658 crore as “conversion” charges, generating controversy. It was labelled as a “back door entry” to full mobility. Around the same time, the DoT used to levy a fee of Rs 4.75 per minute on international calls known as “access deficit charge” (ADC) to fund universal coverage. It is well known that an operator disguised international calls as domestic to bypass ADC. For some time, internet services attracted lower or no licence fee and it became expedient for operators to indulge in license fee “arbitrage” by showing more revenue from internet services. Another manoeuvre was to inflate subscriber numbers to gain access to scarce spectrum in the days when fresh spectrum was administratively assigned based on subscriber numbers. And finally, the shameful spectacle was the battle fought by operators to jump the queue to deposit earnest money for gaining rights over spectrum that was oddly sought to be assigned by a method called “first come first served” and whose definition itself was quite elastic. Thereafter, in the litigation that inevitably followed, the Court cancelled 122 telecom licences and mandated allocation of spectrum by auction.

The above narrative paints operators, public and private, in poor light. Being a highly capital intensive sector, there is no doubt that thousands if not lakhs of crore ride on policy decisions. In their eagerness to influence policy and compete, operators have regrettably sullied their reputations in the interest of short-term gains. But the government cannot completely absolve itself.

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Erosion of trust between the public and private sector in general and in the telecom sector in particular has been a negative externality of the reform process. In this background, when the responsibility to adjudicate on the definition of AGR reached the Court, it was in no mood to give the benefit of doubt to operators, even for legitimate reasons. Trust deficit spreads risk aversion within the system and the telecom sector today is paying the price of its own indiscretions. The good telcos are just collateral damage. In this context, the appeal made by the finance minister during her budget speech for restoration of “vishwaas” between the public and private sectors and between citizens and government is critical. Had there been vishwaas and therefore less litigation, we would not have been a decade behind in connecting 2,56,000 gram panchayats with a broadband network. History is a great teacher. The abiding lesson here is simple and crisp — honesty is the best policy.

This article first appeared in the print edition on February 13, 2020 under the title ‘Missed call’. Kaushambi Bagchi contributed to this piece. Kathuria is director and chief executive, Asrani is consultant at ICRIER. Views are personal.

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