Telecommunication is defined as the science and technology of communication over a distance. The ability to convey information quickly, accurately, and efficiently has always been one of the main focuses driving human innovation. India is currently the world’s second-largest telecommunications market with a subscriber base of 1.20 billion and has registered strong growth in the past decade and half.[1] The Indian Telecom Industry is considered to be a vital tool for the development of the country on the whole by contributing towards the immense growth, quick expansion and up gradation of various sectors of the nation.

“Telecommunication service” means service of any description (including electronic mail, voice mail, data services, audio tax services, video tax services, radio paging and cellular mobile telephone services) which is made available to users by means of any transmission or reception of signs, signals, writing, images and sounds or intelligence of any nature, by wire, radio, visual or other electro-magnetic means but shall not include broadcasting services.[2]

The telecommunications sector has been transformed over the past decade by privatization, liberalization, technological change, and growth in demand. Licensing framework has been an integral part of India’s telecommunication law. Under the Indian Telegraph Act, 1885, section 4 gives power to the government to grant licence to any person to establish, maintain or use a telegraph. However, in the telecom sector, the government had complete monopoly until the early 1990s. Since 1992, the government has allowed licensing in the telecom sector. [3]

The telecom sector was liberalized under the National Telecom Policy, 1994 after which licenses were issued to companies in return for a fixed license fee. In 1999, the new National telecom policy, 1999 was introduced which brought in the revenue-sharing method for licence fee payment. To provide relief from the steep fixed license fee, the government in 1999 gave an option to the licensees to migrate to the revenue sharing fee model. Government was to achieve social and economic goals to provide the service to all uncovered area including rural areas, remote, hilly and tribal areas and to create an efficient infrastructure thereby propelling India into an IT superpower and to increase tele density

Under this, mobile telephone operators were required to share a percentage of their AGR with the government as annual license fee (LF) and spectrum usage charges (SUC). AGR is a fee-sharing mechanism between government and the telecom companies who shifted to ‘revenue-sharing fee’ model in 1999, from the ‘fixed license fee’ model. In this course, telecom companies are supposed to share a percentage of AGR with the government.[4]

 License agreements between the Department of Telecommunications (DoT) and the telecom companies define the gross revenues of the latter. To arrive at the formula of “AGR,” the Draft License Agreement was circulated to the telecom operators.  It is pertinent to note that the Draft License Agreement provided clause 18.2, which pertains to an   annual   license   fee   payable   as   a   percentage   of   adjusted   gross revenue (AGR).

AGR is then computed after allowing for certain deductions spelt out in these license agreements. The Licensee fee and Spectrum usage charges were set at 8 per cent and between 3-5 per cent of AGR respectively, based on the agreement.[5]

The dispute between DoT and the mobile operators was mainly on the definition of AGR. The definition of AGR has been under litigation for 14 years. The DoT argued that AGR includes all revenues (before discounts) from both telecom and non-telecom services. (Non-core sources such as rent, profit on sale of fixed assets or sale of scrap, corporate deposits, real estate transactions, handset sales, dividend income and interest and miscellaneous income.) The companies claimed that AGR should comprise just the revenue accrued from core services and not dividend, interest income or profit on sale of any investment or fixed assets. The definition of AGR has been such a contentious issue because it has huge financial implications for both telcos and the government. The revenue shared by telcos with the government goes into the consolidated fund of India.

The issue has been under litigation since 2003. In 2005, Cellular Operators Association of India (COAI) challenged the government’s definition for AGR calculation.  However the dispute over the definition of adjusted gross revenue (AGR) between the Department of Telecommunications and telecom operators took an eventful turn in 2007-08. In 2007-8, Telecom Disputes Settlement and Appellate Tribunal (TDSAT) had narrowed the scope of AGR.[6]

 In 2015, the TDSAT (Telecom Disputes Settlement and Appellate Tribunal)[7] stayed the case in favour of telecom companies and held that AGR includes all receipts except capital receipts and revenue from non-core sources such as rent, profit on the sale of fixed assets, dividend, interest and miscellaneous income.[8]  This Court in Union of India v. AUSPI[9] held that Tribunal has no jurisdiction to exclude certain items of revenue, which were included in the definition of AGR.  The licensee could   not   have   approached   the   Tribunal   for   the   alteration   of   the definition of AGR in the license agreement.  TRAI and Tribunal had no jurisdiction to decide   on   the validity of the definition   AGR in   the license agreement.

However, setting aside TDSAT’s order, Supreme Court on October 24, 2019 upheld the definition of AGR as stipulated by the DoT. In a massive setback for telecom companies, the SC rejected their definition of AGR and exposed the firms to demands by the Department of Telecom (DoT) of more than Rs 1 lakh crore. The court ordered to include all revenues, except for termination fee and roaming charges, as a part of the AGR.[10] The SC bench termed the operators’ (licensees) conduct as “highly unfair” even after they benefited from migrating to revenue sharing under the revised telecom policy of 1999 from the fixed license fee scheme under the national policy of 1994. The court further highlighted how the 15% AGR, fixed as the license fee under revenue sharing, was reduced to 8% in 2013.

CURRENT STATUS

The Supreme Court of India upheld the Department of Telecom (DoT)’s interpretation of “adjusted gross revenue” (AGR), which came as a huge blow to telecom service providers.

The total amount due as per the Department of Telecom’s submission to the Supreme Court is Rs 119,292 crore. So far telecom players have paid Rs 25,896 crore. The balance payment of Rs 93,520 crore remains due. The AGR directly impacts the outgo from the pockets of telcos to the DoT as it is used to calculate the levies payable by operators. Telecom companies now owe the government not just the shortfall in AGR for the past 14 years but also an interest on that amount along with penalty and interest on the penalty. The October 2019 judgment originally wanted the telcos to make the repayment in three months. But the Centre intervened, saying it would create a huge financial dent in the telecom sector. The Supreme Court in its 1st September, 2020 order has asked telcos to pay 10% of the AGR dues upfront and has set a 10-year payment timeline for the rest of the amount. While the telco may just survive for now, its journey will get even more painful. In a series of directions to the telcos, the court in its judgement headed by Justice Arun Mishra said they shall raise no dispute nor will they be any reassessment of the dues. The telecom operators would make the payment of 10% of the total dues as demanded by Department of Telecom by March 31, 2021. The yearly instalments would commence from April 1, 2021 up to March 32, and 2031. The instalments would be paid by March 31 every year.[11]

The total amount to the government is owed by about 15 operators. However, 10 of them have either closed operations or are undergoing insolvency proceedings in the last 14 years. They include Reliance Communications, Telenor, Tata Teleservices, Aircel and Videocon. Currently, the Indian telecom sector has four players — Bharti Airtel, Reliance Jio, Vodafone Idea and state-owned BSNL/MTNL (Bharat Sanchar Nigam Limited/Mahanagar Telephone Nigam Limited) — so the government is unlikely to recover the entire amount of dues owed to it.

Of the current players, Bharti Airtel and Vodafone Idea are the most affected by this order. Both Bharti Airtel and Vodafone Idea have already been reeling under the pressure of the Adjusted Gross Revenue (AGR) dues that the Supreme Court asked them to pay. Bharti Airtel’s total AGR dues stand at Rs 43,000 crore of which the telco has paid close to Rs 18,000 crore. Vodafone Idea on other hand, has paid Rs 7,800 crore of the Rs 58,000 crore it owes in AGR dues.

The least impacted by the Supreme Court order in the private sector is the relatively new entrant in the market, Reliance Jio. The Mukesh Ambani-owned firm forayed into the sector in September 2016 and owes the government about ₹14 crore.

Government’s stand– With the court mandating that the dues be paid within a period of three months, the government has set up a panel headed by cabinet secretary Rajiv Gauba comprising secretaries in the telecom, finance, and law ministries to consider a bailout package with likely options of a two-year moratorium on spectrum payments, reductions in the Universal Service Obligation Fund (USOF) component of the license fee, currently at 5% of AGR and in SUC charges. The panel is also expected to seek legal opinion over the matter.[12]

The telecom industry is reeling under a debt of over ₹4 lakh crore and has been seeking a relief package from the government. While the government has been deprived of the extra revenue, the financial implications for telecom companies — who now have to cough up overdue amounts piled up for years — are serious too. Especially at the current juncture, when profits for telcos are under pressure from severe competition and the falling ARPUs (average revenue per user).

MAJOR CHALLENGES

  • Sustained loss for major telecoms companies over the years leading to exit of major telecom companies from the business.
  • Telecom sector already reeling under daunting stress of debt outstanding Rs.4 Lakh crore.
  • Potential threat of monopolization of a single player e.g. Reliance Jio in the telecom sector or Duopoly of Reliance Jio and Bharti Airtel.
  • Low fixed line penetration in India and High right of way cost from states to lay optical fiber consequently adding up to their factor cost.
  • Due to intense competition from free voice and cheap data, the gross revenue of the telecom operators had fallen in the recent times. Currently the price of data for customer is among the lowest in the world.
  • The average revenue per user (ARPU) per month has also declined from Rs174 in 2014-2015 to Rs.113 in 2018-2019.
  • Lack of robust telecommunication infrastructure in India and slaked off R&D expenditure has been plaguing the industry for long.

The implications

  • The October judgement has sent tremors across the telecom service providers but the two private operators who have been extensively impacted are Vodafone Idea lim. And Bharti Airtel lim. These two telecom companies have to pay a huge chunk of the payment amount which causes a worry for the already stressed sector. The SC has made it clear that it will not permit any self-assessment by the companies or re-calculation.
  • The payout by the telecom is likely to lead to windfall gain for the central government which could possibly bridge the already widening fiscal deficit for the current financial year.
  • The government will also be under tremendous pressure to ensure that the telecom market survives and thrives because it is one of the highest revenue generating sector and critical for development related schemes of the government.
  • It can lead to exit of Vodafone idea lim. Due to its sustained loss and outstanding AGR payment. This could lead to potential duopoly of Reliance Jio and Bharti Airtel which can scale up consumer’s data tariffs.
  • The company’s actions will now determine whether it plans to merely survive, which will mean continued erosion in market share, or fight back with a sizeable fund infusion.
  • The AGR issue may add to the vulnerability of an already fragile banking system. Apart from impacting the banking sector, the collapse of the telecom sector may increase unemployment, and reduce investment, adding to our economic and social problems.
  • The SC judgment will have serious implications on the expected rollout of 5G in India this year considering the poor financial shape of the telecom giants, spectrum auctions will probably find few bidders in the market, thereby, a delay in rollout of 5G in the country emerges as a likely scenario. Further the closure of some firms could also lead to one or two players emerging in the telecom market with high pricing power in a potential duopoly situation.

Supreme Court in its long Judgement concluded with words“No litigant can be permitted to reap fruits on such inconsistent and untenable stands and litigate for   decades   in   several   rounds   which   is   not   so   uncommon   but   is disturbing scenario projected in very many cases.”

These word marked an end to a long drawn slugfest between DoT and the telecom companies over the AGR issue. This judgement is going to have far reaching ramifications across the telecom sector. The Stressed sector needs the government’s hand holding to survive in the market. The government also on its part has to walk the tightrope in order to save this sector from collapsing and to continue contributing to the revenue generation. Analysts having downgraded Airtel and Vodafone Idea’s ratings further contend that the Indian telecom industry could well be heading towards duopoly with a likely exit of Vodafone Idea. Notably, of the 15 service providers that have been served the payout order, only three private operators remain in operation today; the rest being shut or referred for bankruptcy proceedings. Both Vodafone Idea and Bharti Airtel, which owe the maximum amounts, had on July 20 revised their demand from 20 years to 15 years for the staggered payments after SC’s stringent stance on payment period.

All Telco’s should be given time and reasonable terms to pay these debts so that jobs and confidence in India can remain in market. Now that all customer is with Jio it cannot afford to keep losing money at same rate so customers’ bills have already started to head back up towards previous levels and this will make existing players more attractive to customers again. Since the telecom industry is crucial to India’s next wave of growth through digitalization (as envisaged in National digital communication policy, 2018) and the government should not be blinded by short-term revenue considerations that imperil long-term prospects.


[1] www.ibef.org/industry/indian-telecommunications-industry-analysis-accessed on 20th Oct, 2020.

[2] Section 2(k) of the TRAI Act, 1997.

[3] https://cis-india.org/telecom/resources/licensing-framework-for-telecom-accessed on 20th Oct, 2020.

[4]https://www.cnbctv18.com/telecom/explained-what-is-agr-and-why-are-govt-and-telecom-firms-in-supreme-court-over-it-6117381.htm-acceseed on 20th Oct, 2020.

[5]https://www.thehindubusinessline.com/opinion/columns/slate/all-you-wanted-to-know-about-agr/article30008124.ece#- accessed on 20th Oct, 2020.

[6]https://swarajyamag.com/news-brief/explained-the-long-history-of-adjusted-gross-revenue-agr-dispute-between-dot-and-telecom-companies- accessed on 20th Oct, 2020.

[7] Section 14(a) (i) read with Section 14(A) (1) of   the   Telecom   Regulatory   Authority   of   India   Act,   1997.

[8] Union of India and another v. Association of Unified Telecom Service Providers of India, (2011)   10   SCC   543.

[9] Supra note 7.

[10] https://dot.gov.in/licensingfinancepublic/supreme-court-agr-judgment-dated-24102019- accessed on 20th Oct, 2020.

[11]https://www.thehindu.com/news/national/supreme-court-directs-telcos-to-pay-agr-dues-in-10-years/article32493787.ece- accessed on 20th Oct, 2020.

[12]https://telecom.economictimes.indiatimes.com/news/agr-issue-heres-the-complete-rundown-of-recent-supreme-court-order/71968985- accessed on 20th Oct, 2020.

(Author: Reha Sinha)

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