All stakeholders are to blame for the mess India's telecom companies find themselves in, and it′s damaging India's efforts to project an investor friendly image abroad, writes India Inc. Founder and CEO Manoj Ladwa.
India's Department of Telecommunications′ unreasonable demand of $21 billion from the country's ailing telecom companies will cripple India′s burgeoning telecom sector.
All stakeholders - the telecom companies, public sector companies, the Government of India and the Supreme Court of India - are responsible for this current dilemma.
The easiest solution will be to issue an order defining AGR as excluding all non-telecom revenues of public sector undertakings and granting a more reasonable period within which payments can be made.
There is a theatre of the absurd playing out in India's telecom sector that is threatening to cripple it entirely. I am talking about India's Department of Telecommunications′ (DoT) completely unreasonable demand of about $21 billion from the country's ailing telecom companies as past dues on account of license fees (LF) and spectrum usage charges (SUC). Then, non-telecom companies such as gas producer GAIL, oil producer Oil India and power transmission company Power Grid Corporation, all public sector companies that hold telecom licenses for their limited captive use, have also been asked to pay more than $35 billion - an amount that will wipe out their net worth and render them bankrupt.
To be fair, all stakeholders - the telecom companies, the public sector companies holding telecom licenses, the Government of India and the Supreme Court of India - are responsible for the current sorry state of affairs. To save the then fledgling private sector telecom companies from steep license fees, the Vajpayee government in 1999 allowed them to migrate to a revenue sharing model. Under this arrangement, telecom license holders agreed to pay the government a percentage of their aggregate gross revenue (AGR) as LF and SUC. The devil, as always, lay in the detail.
In an inexcusable legal oversight, the term AGR was left undefined. Consequently, DoT interpreted it as revenues from telecom services as well as non-telecom services - such as interest earned, dividends and rental income received as well as, in the case of the public sector companies, the revenues earned from their core activities such as gas transportation, oil exploration and power transmission - and demanded percentage from those earnings too! This was clearly an absurd, unfair and confiscatory case of bureaucratic overreach. The Telecom Disputes Settlement and Appellate Tribunal (TDSAT), which deals with disputes in the Indian telecom sector, granted a stay on DoT's definition but before it could come out with a final verdict, the Supreme Court - which had been approached by the Congress government in 2011 on the same issue - ruled in DoT's favour.
Along with penalties and interest on past unpaid dues, Bharti Airtel and Vodafone-Idea, India's second and third largest telecom companies, owe DoT more than $7 billion each - which they must pay immediately. Both have said they will honour their obligations, though the latter is likely to go bankrupt in the process. This will have disastrous consequences for the Indian economy and India's global image as a safe and inviting investment destination. It will revive memories of the Congress government era cancellation of telecom licenses and coal mine allocations and the retrospective tax issue. Vodafone is still fighting the issue in courts - that severely dented India's image and lend credence to the view that arbitrary policy interpretations can bedevil investors in India. It will also reduce India's till recently burgeoning telecom sector to an effective duopoly; cheap data and call rates may become a thing of the past; and the pending rollout of 5G networks, with its massive technology and economic benefits, may be imperilled or, at the very least, delayed.
Media reports say the Modi government is burning the midnight oil to come out to a solution to this issue. The simplest - to say AGR includes only telecom revenues - is also the most politically sensitive since the Opposition will immediately cry SCAM at any bailout of seemingly deep pocketed Indian and foreign companies.
The easiest way out, in my mind, will be to issue an order defining AGR as excluding all non-telecom revenues of public sector undertakings and granting a more reasonable period within which payments can be made. Surely, no opposition leader can possibly object to this Well, one would hope so. Once this point is established, it should be a hop, skip and jump for private sector telecom companies to move court on the grounds of parity of treatment and obtain similar relief for themselves.
The Prime Minister's Office (PMO), the Finance Ministry and the Telecom Ministry are discussing possible solutions with all stakeholders and will announce a decision soon. I can only hope that this highly avoidable crisis doesn't damage India's reputation that the Modi government has done so much in the last six years to nurture and improve.
Manoj Ladwa is the Founder and CEO of India Inc. publishers of India Global Business magazine.