The Culpability of Telecom Sector Crisis?

[By Arpit Saini]

The author is a third year student of National Law University, Jodhpur and can be reached at arpitsaini07.as@gmail.com

The Crisis

Vodafone Idea Ltd. and Bharti Airtel have sustained their position as top-ranked mobile service providers in the Telecom Industry for several years. Within the last 14 years in the industry, as many as 10 players have either closed down their business or have undergone insolvency proceedings but these two operators stood their ground against all adverse situations, noticeable from their reaction to the revolutionary introduction of Reliance Jio, increased price competition and decreasing tariffs on calls and data usage.

However, the Supreme Court (“SC”) decision on 24th October 2019 concerning the definition of Adjusted Gross Revenue gave a crippling blow to these operators. Consequent to the decision, Vodafone and Airtel are supposed to pay Rs. 28,309 Cr. and Rs. 21,682 Cr. respectively to the Department of Telecommunications (“DoT”). These operators, now, face a threat of possible bankruptcy which will leave Reliance Jio as the only major private player in the market.

The companies seek a remedy in the form of review petition to the SC.[i] However; the decision to file a review is only ‘evasive’. SC has made the decision after a long-standing dispute of 16 years and has manifestly pinpointed the reckless attitude of these operators which lead them to this situation.

The disputed definition of AGR

In the telecom sector, DoT issues a license to the operator in consideration of certain license fees and spectrum usage charges. Upon liberalization of the industry in 1994, DoT determined a fixed amount of money as consideration. The operators often defaulted in their payments since the fixed amount was highly burdensome. As a result, they made a representation to the Government of India (“GoI”) for a relief in the amount. GoI addressed the issue and formulated a new National Telecom Policy in 1999. The policy gave the operators an option to shift from the fixed license fee to a revenue-sharing model. Through the model, GoI became a partner of the operators and would share every operator’s gross revenues. It entered into a Draft License Agreement (“Agreement”) with the operators wherein it was to receive a certain percentage from the head of Adjusted Gross Revenues (“AGR”). Clause 18.2 of the Agreement specified that an annual license fee had to be paid as a percentage of AGR.

However, DoT’s determination of quantum of fees caused several issues before long. The department included within the definition of the term “AGR” various other elements of income which did not accrue from operations under the license such as dividend, interest, discounts on calls, profits on sale of fixed assets, revenues from other activities separately licensed, etc. Conflictingly, operators opined that the definition only included revenue from operations related to telecom services. Thus, the Association of Basic Telecom Operators (known as Cellular Operators Association of India) and the respective operators filed a petition before the Telecom Disputes Settlement and Appellate Tribunal (“TDSAT”) in 2003 asserting that DoT was supposed to follow the recommendations of Telecom Regulatory Authority of India (“TRAI”).

TRAI had up till now only made recommendations concerning the terms and conditions under which new operators were to be given a license. Subsequently TDSAT, in 2006, referred to the Indian Telegraph Act, 1885 and ordered that the Government can take a percentage of the share of gross revenue of only those operations for which the license was given. Simultaneously, it urged the TRAI to specifically make recommendations on the definition of AGR and clarify which heads are to be included under it.

DoT made an appeal against this order to SC, which dismissed the appeal stating that contentions must first be raised before the TDSAT. When raised before TDSAT, it observed that the matter was already decided upon and cannot be heard again. Eventually in 2011, SC clarified that TDSAT can look into the merits of the claim if appeal is made by the DoT (the licensee) to decide upon the terms and conditions of the agreement. Now, the DoT contended before the TDSAT that the Agreement was put in place before any recommendations were made by TRAI and, therefore, only the terms and conditions of the Agreement should be considered for the definition. Thus, it wanted to give effect to Clause 19 of the Agreement which specifically defined AGR. Meanwhile, TRAI sent its ‘Recommendations on Definition of Revenue Base (AGR) for the Reckoning of Licence Fee and Spectrum Usage Charges’. The Tribunal now had to decide upon the definition having regard to the operators’ claims, TRAI’s recommendations and DoT’s contentions.

On April 23, 2015, TDSAT set aside DoT’s demands and decided in favour of the operators keeping in mind the recommendations by TRAI. DoT was resultantly directed to reconsider the license fees. DoT, however, moved the Supreme Court against the TDSAT order. Now, recently on 24th October 2019, the SC ruled in favour of the DoT and ordered the telecom sector operators to pay Rs. 92,641 Cr. for the disputed amount along with the penalty for default and interest on that penalty.[ii]

The question which now arises is –‘Who is to be blamed for this crisis faced by the telecom operators?’ The operators have always criticized the telecom sector as unviable and unsustainable. According to their claim, the unsupportive regulatory environment of the sector is beneficial for anybody but the operators. Frankly, however, the operators have only themselves to blame for the present fiasco.

Analysing ignorance on part of telecom operators

The telecom operators were always legally responsible to follow the terms of the revenue-sharing model as part of their performance under the Agreement with the GoI. The Agreement derived the power to grant license from the proviso to sub-section (1) of Section 4 of the Telegraph Act and was in the nature of a contract between the GoI and these operators. DoT had drawn up the terms and conditions of the agreement after detailed deliberations and consultations with the stakeholders. It had precisely kept in mind the amount of revenue share to be gathered from the sector and consciously disregarded any accounting policies in reference to the definition. Therefore, it framed clause 19.1 of the agreement in such a manner which explicitly included income from miscellaneous revenue as a part of AGR.[iii] Under clause 19.2[iv], it also clarified the certain items which were to be excluded from the Gross Revenues under clause 19.1 to arrive at computation for AGR. This clause did not mention any miscellaneous income for exclusion. Thus, the telecom operators were always under a duty to pay the contested dues concerning AGR.

However, the operators fatuously contested the definition of AGR for over a decade in an attempt to avoid the complete payment of the revenue share. Their claim in the matter was solely based on TRAI’s recommendations which performed no role in planning the definition. SC had given signs with its unfavorable remarks concerning the definition, and the Comptroller Auditor General’s Report of 2017[v] made it overtly clear that the stand of the operators before the SC is frail. Despite the same, the operators neglected to counter the situation. They demonstrated a thoughtless behavior by failing to make provisions in the anticipation of an adverse decision and instead using the funds for price competition with Jio, expanding their business to foreign markets or hefty payouts to increase their share.[vi] SC thus, understandably termed their conduct as ‘unfair’ asserting that they had been deliberately avoiding their dues in violation of their contractual obligations based on frivolous and baseless contentions.[vii]

Conclusion

The present scenario of the telecom sector crisis is a prime example of the importance of corporate compliance and management. Rules and regulations are put in place in every sector to safeguard the interests of the companies and protect the investors. This ensures that the market is operating in a fair, efficient and transparent manner. Any non-compliant action has a far reaching financial and reputational damage on the firm or the company. Operators are, therefore, expected to be aware of their responsibilities and adhere to the laws and regulations.

 End Notes

[i] Navadha Pandey, ‘DoT tells telecom operators to start self-assessment of dues’ (livemint, 14 Nov 2019)

[ii] Murali Krishnan, ‘Adjusted Gross Revenue: Background of the Supreme Court judgment’ (Bar&Bench, 30 Oct 2019).

[iii] Clause 19.1, Draft Licensing Agreement, 1999.

[iv] Clause 19.2, Draft Licensing Agreement, 1999.

[v] Report of the Comptroller and Auditor General of India, Sharing of Revenue by Private Telecom Service Providers upto 2014-15, [Report No. 35 of 2017 Union Government (Communications and IT Sector)].

[vi] ‘SC Verdict on AGR: Telcos Have Long Ignored Warning Signals on Under-reporting Revenue’ (Dailyhunt, 29 Oct 2019).

[vii] SS Sirohi ‘Supreme Court verdict on AGR a clear setback for telecom firms, but they long ignored warning signs’ (Firstpost, Nov 02, 2019).

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