There is something extremely ironic about the telecom sector in
India. On the one hand, Indian telecom companies-especially private
mobile telephony players-have reformed the communications landscape,
placing India on the cusp of a potential digital transformation. On the
other, Indian telecom operators are wading through what is perhaps one
of their worst business phases in recent history-saddled with debt, huge
losses and a policy overhang that has rendered business quite
precarious.
The latest in a string of events that have caught the telecom sector on the wrong foot is a Supreme Court order on how much telecom operators needed to pay for the airwaves (spectrum) they need to conduct their business. While operators had argued that they should be charged on the basis of the core business that is conducted using the allotted spectrum, the Department of Telecommunications (DoT) argued that the definition of the adjusted gross revenue (AGR) included other items, such as dividend, interest, capital gains on the sale of assets and securities, as well as gains from foreign exchange fluctuations, amongst others. The SC upheld the DoT's argument, which means that telecom operators will need to cough up as much as Rs 1.33 lakh crore, including interest. For a sector that already has a debt overhang of Rs 4 lakh crore, such a huge fee (to be paid within three months), spells disaster.
The belief is that this move will leave just one player in the fray-Reliance Jio Infocomm-with the two other large players, Bharti Airtel and Vodafone Idea, facing real trouble. And there are already rumours that Vodafone is looking to exit the country, though the company has said it won't. But why should it stay? It is already saddled with Rs 98,000 crore in debt, and as per reports, it needs to pay Rs 19,823.71 crore to the government as spectrum dues. Airtel, which has a debt of over Rs 1 lakh crore, owes Rs 21,682.13 crore as a licence fee to the government. Reliance Communications, which ceased mobile telephony operations as debt mounted, owed a total of Rs 16,456.47 crore. (The AGR dispute dates back to 2005, and the claim amount has ballooned because of interest and penalties.)
'This
decision (of the Supreme Court) has come at a time when the (telecom)
sector is facing severe financial stress, and may further weaken the
viability of the sector as a whole,' said Airtel in a statement. The
company also said the government needed to find a way to reduce the
burden on the industry.
The Cellular Operators Association of India (COAI) has taken up cudgels on behalf of the incumbent players and has said that taxes and levies in the country were already among the highest in the world and that it was uncertain whether the sector would be able to recover from this setback. Further, it appealed to the government not to press for payment of AGR-based dues and to grant waivers. However, Reliance Jio, the youngest entrant, has got into a war of words with the COAI, and has said in a controversial statement that its rivals Vodafone Idea and Bharti Airtel should not be bailed out for their 'commercial failure and financial mismanagement'.
This fight between industry and government does not augur well for telecom companies, especially after the AGR ruling. 'AGR could add significantly to the already gargantuan liability of telecom operators towards the Government of India', noted Crisil. While the judgment has made clear the definition of AGR, clarity is awaited regarding the exact liability of the individual operators and the payment terms. 'As we understand [it], operators and DoT will have to mutually work out the liabilities under the new definition of the AGR,' Crisil added. Telecom operators are also contemplating various recourses, including filing a review petition with the Supreme Court.
The Indian telecom sector, already muddled by the infamous 2G scam (which was not subsequently upheld by the courts), turned into a war zone with the entry of Reliance Jio Infocomm in late 2016. When the private sector incumbents-Vodafone and Idea (which merged in 2018) and Bharti Airtel-reduced tariffs to match the heavily discounted offers from Jio, their own profitability took a beating. (Other victims of this war include public sector Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telecom Nigam Ltd (MTNL), both also saddled with losses and awaiting a government bail-out.) And the high spectrum costs for government-auctioned airwaves did not help either. In August this year, Airtel said posted its first quarterly loss in 14 years for the June quarter, swinging to a Rs 2,866 crore loss from a Rs 97 crore net profit a year ago. Meanwhile, Vodafone reported a net loss of Rs 4,067.01 crore in the first quarter ended June 2019, compared to a net loss of Rs 2,757.60 crore in the year-ago period. Fitch Ratings has put Bharti Airtel on 'rating watch negative' while Care Ratings downgraded Vodafone Idea on long-term bank facilities and non-convertible debentures, leading to their shares falling on the BSE on October 31, but recovering marginally thereafter.
The latest in a string of events that have caught the telecom sector on the wrong foot is a Supreme Court order on how much telecom operators needed to pay for the airwaves (spectrum) they need to conduct their business. While operators had argued that they should be charged on the basis of the core business that is conducted using the allotted spectrum, the Department of Telecommunications (DoT) argued that the definition of the adjusted gross revenue (AGR) included other items, such as dividend, interest, capital gains on the sale of assets and securities, as well as gains from foreign exchange fluctuations, amongst others. The SC upheld the DoT's argument, which means that telecom operators will need to cough up as much as Rs 1.33 lakh crore, including interest. For a sector that already has a debt overhang of Rs 4 lakh crore, such a huge fee (to be paid within three months), spells disaster.
The belief is that this move will leave just one player in the fray-Reliance Jio Infocomm-with the two other large players, Bharti Airtel and Vodafone Idea, facing real trouble. And there are already rumours that Vodafone is looking to exit the country, though the company has said it won't. But why should it stay? It is already saddled with Rs 98,000 crore in debt, and as per reports, it needs to pay Rs 19,823.71 crore to the government as spectrum dues. Airtel, which has a debt of over Rs 1 lakh crore, owes Rs 21,682.13 crore as a licence fee to the government. Reliance Communications, which ceased mobile telephony operations as debt mounted, owed a total of Rs 16,456.47 crore. (The AGR dispute dates back to 2005, and the claim amount has ballooned because of interest and penalties.)
The Cellular Operators Association of India (COAI) has taken up cudgels on behalf of the incumbent players and has said that taxes and levies in the country were already among the highest in the world and that it was uncertain whether the sector would be able to recover from this setback. Further, it appealed to the government not to press for payment of AGR-based dues and to grant waivers. However, Reliance Jio, the youngest entrant, has got into a war of words with the COAI, and has said in a controversial statement that its rivals Vodafone Idea and Bharti Airtel should not be bailed out for their 'commercial failure and financial mismanagement'.
This fight between industry and government does not augur well for telecom companies, especially after the AGR ruling. 'AGR could add significantly to the already gargantuan liability of telecom operators towards the Government of India', noted Crisil. While the judgment has made clear the definition of AGR, clarity is awaited regarding the exact liability of the individual operators and the payment terms. 'As we understand [it], operators and DoT will have to mutually work out the liabilities under the new definition of the AGR,' Crisil added. Telecom operators are also contemplating various recourses, including filing a review petition with the Supreme Court.
The Indian telecom sector, already muddled by the infamous 2G scam (which was not subsequently upheld by the courts), turned into a war zone with the entry of Reliance Jio Infocomm in late 2016. When the private sector incumbents-Vodafone and Idea (which merged in 2018) and Bharti Airtel-reduced tariffs to match the heavily discounted offers from Jio, their own profitability took a beating. (Other victims of this war include public sector Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telecom Nigam Ltd (MTNL), both also saddled with losses and awaiting a government bail-out.) And the high spectrum costs for government-auctioned airwaves did not help either. In August this year, Airtel said posted its first quarterly loss in 14 years for the June quarter, swinging to a Rs 2,866 crore loss from a Rs 97 crore net profit a year ago. Meanwhile, Vodafone reported a net loss of Rs 4,067.01 crore in the first quarter ended June 2019, compared to a net loss of Rs 2,757.60 crore in the year-ago period. Fitch Ratings has put Bharti Airtel on 'rating watch negative' while Care Ratings downgraded Vodafone Idea on long-term bank facilities and non-convertible debentures, leading to their shares falling on the BSE on October 31, but recovering marginally thereafter.
