THE INDIAN TELECOM CASE

Current Telecommunication Market Scenario:

Currently, in India, there are only three major telecommunication companies who provide Mobile Cellular and related services i.e. Vodafone Idea, Reliance Jio, and Bharti Airtel. Based on the data published by Department of Telecommunication in the month of November 2019, there has been a decrease in the number of Mobile connections from 1161.71 Million connections to 1154.39 Million i.e. 7.32 Million less (fall of 2.44%). Further, there was a decrease in Tele-density from 90.10 (in %age) to 88.81 (in %age)[1]. Currently, Reliance Jio is the largest telecom operator with a subscriber base of 369.93 million and market share to 32.04 per cent[2]. Bharti Airtel has also reported that its subscriber base has increased by 1.65 million in the last month totalling to 327.30 million users that gives a 28.35 per cent market share[3]. However, Vodafone Idea is losing its subscriber base by 36.41 million every month resulting in immense pressure upon the company[4]. Currently, Vodafone Idea holds 29.12 per cent market share in the telecom sector.[5]

The AGR Outlook:

In India, every Indian telecom operator has to pay a fixed amount of License Fee as per section 4(1) of the Indian Telegraph Act 1885 which states:

“4. Exclusive privilege in respect of telegraphs, and power to grant licenses.

Within [India], the Central Government shall have the exclusive privilege of establishing, maintaining and working telegraphs:

Provided that the Central Government may grant a license, on such conditions and in consideration of such payments as it thinks fit, to any person to establish, maintain or work a telegraph within any part of [India]”[6]

The amount of license fee and the way if its calculation is contained in each license agreement which is executed between the Telecom Operator and the Department of Telecommunication (DoT). Currently, the amount of license fee is fixed at 8% of the Adjusted Gross Revenue. Further, as per the license fee agreement, the definition of AGR is as follows:

“19.1 Gross Revenue:

The Gross Revenue shall be inclusive of installation charges, late fees, sale proceeds of handsets (or any other terminal equipment etc.), revenue on account of interest, dividend, value-added services, supplementary services, access or interconnection charges, roaming charges, revenue from permissible sharing of infrastructure and any other miscellaneous revenue, without any set-off for related item of expense, etc.

19.2 For the purpose of arriving at the “Adjusted Gross Revenue (AGR)” the following shall be excluded from the Gross Revenue to arrive at the AGR

I. PSTN related call charges (Access Charges) actually paid to other eligible/entitled telecommunication service providers within India;

II. Roaming revenues actually passed on to other eligible/entitled telecommunication service providers and;

III. Service Tax on provision of service and Sales Tax actually paid to the Government if gross revenue had included as component of Sales Tax and Service Tax”[7]

This definition requires a telecom operator to consider the revenue at gross basis which included interest, dividend, sale proceeds from handsets, etc. and the allowed deductions on actual payment basis which were limited to above-mentioned categories.

However, later, the telecom operators found this to be unreasonable and challenged the same in court. Based on contentions the followings points were required to be considered while calculating the AGR:

1. The AGR should be on the accrual basis including the deductions mentioned above

2. The deductions should have a deduction of Bad Debt incurred, discounts paid to distributors and other telecom related expense.

3. The income should not contain the revenue from the sale of handset, interest & dividend. It should be purely based on the Income from Telecom Operations.[8]

This dispute was long going on and various authorities issued ruling on this including the Tribunal, TDSAT and State High Courts. However, post that the said matter was pending in front of the Supreme Court on the grounds that the calculation of AGR is not appropriate and it should include abovementioned recommendations also.

Further, on 24 October 2019 Hon’ble Supreme Court passed the long-awaited order over the AGR issue (SC AGR Judgement). The said SC AGR Judgement upheld the DoT view of calculation and specifically mentioned that:[9]

1. In this case, the Hon’ble Supreme court held that the terms and conditions of the licence, including the definition of gross revenue in the licence agreement, are part of the contract. The Central Government alone has the right to define revenue and has parted with the privilege under section 4 of the Telegraph Act. A licence granted under section 4(1) of the Telegraph Act is in the nature of the contract between the Central Government and the licensee. The provisions of the TRAI Act do not affect the specific exclusive privilege of the Central Government to carry on telecommunication activities, nor do they alter the contractual nature for the licence granted under the proviso to section 4(1) of the Telegraph Act.[10]

2. The tribunal has no jurisdiction to decide upon the validity of terms and conditions incorporated in a licence; it has jurisdiction to decide any dispute between the licensor and the licensee on the interpretation. It has also been observed to make a final decision on the definition of the gross revenue in the licence agreement, the Government has the competence. The licence fee would be a percentage of gross revenue, which would be the total revenue of the licensee company mentioned as per the license agreement. [11]

3. Hence, the demand raised by the DoT from time to time pertaining to the levy of interest, penalty and interest on penalty upheld the Hon’ble Supreme court by passing a supplementary order directed payment of dues to be made within 3 months from the date of that order was issued. [12]

However, the said period of 3 months has already ended on 23 January 2020. A Review Petition was filed by the Vodafone Idea Limited along with other telecom operators against the above SC AGR Judgement which was dismissed on 16th January 2020. Bharti Airtel has submitted over ? 18,000 crores to the DoT declaring that it has made full and final settlement towards its AGR liabilities but the amount is far less than ? 37,500 crore (including Telenor) that the government estimates the company is required to pay to the DoT[13]. Vodafone Idea has already deposited Rs 3,500 crore in two tranches to the DoT pertaining to the AGR dues as partial payment however Vodafone Idea is still assessing the situation and liability for the full demand. According to the government's calculation, Vodafone Idea owes ? 53,000 crores towards AGR dues.[14]

The Curious case of Vodafone Idea

Last year, on 31 August 2018, Vodafone India Limited (and its subsidiaries) merged with Idea Cellular Limited to form Vodafone Idea Limited. Prior to that Vodafone India Limited was owned by Vodafone Group Plc and the Idea Cellular Limited was owned by the Aditya Birla Group. Currently, post-merger, Vodafone Group Plc, through its subsidiaries, holds 45.28% in the Vodafone Idea Limited and 26% is owned by Aditya Birla Group.[15] Further, based on the consolidated financial figures released for the third quarter of FY 2019-2020 following is the financial summary for the Vodafone Idea Limited is as follows[16],

1. Vodafone Idea has made a loss of ? 58.88 Billion ( ? 5,888 Crore) (before exceptional items & share from Joint Venture) in its operations.

2. Further, the company defaulted in certain of its covenants over the loan of ? 102.06 Billion (? 10,206.20 Crore) due to which the Loan amount has become due to be repaid. However, the Company is exchanging correspondences and is in discussions with these lenders for the next steps /waivers [17].

3. Further, the credit rating of certain borrowings have been revised to “BBB-“ As a result, certain lenders have asked for an increase of interest rates for which the Company is in discussion with such lenders. If the Company does not agree with such an increase in interest rates, it has to prepay the borrowings.

4. Further, the company has received a demand notice of ? 67.94 Billion (? 10,687 Million and ? 57,254 Million) (? 6794.10 Crore) for one spectrum charge which is still under dispute with the DoT.

Further, post judgement, Vodafone Idea Limited has recognized a total estimated liability of ? 441.5 billion (? 44,150 Crores) in the third quarter of FY 2019-2020. Out of which, on 17 February 2020, Vodafone Idea has only paid ? 25 Billion ? 2,500 Crore). Still Vodafone Idea Limited has to pay ? 416.5 Billion (? 41,650 Crore) to the Government. This depicts that even after the merger the Vodafone Idea Limited is not performing well. Further, there is an AGR demand which is required to pay but as of the current position, it is not possible for the company to pay the same in full.

Furthermore, Vodafone Idea has requested to government to allow further extension in payment of the AGR dues based on the SC AGR Judgement otherwise the company can land into serious financial issues. Currently, the company even after the Vodafone Idea merger is suffering from losses on a quarter to quarter basis. This has already raised huge doubts over the going concern assumption of the company.

Indus way of working:

Except for the Reliance Jio, Indian Telecom Operators work in a model where the Passive Infrastructure i.e. towers and related equipment are parked under one entity which in turn allows each operator to share the tower facility equally. That entity is Indus Towers Limited, currently not listed on any stock exchange. Based on the holding and annual returns filed for the financial year 2018-19 Bharti Infratel Limited and Vodafone India Limited (through its holding companies after Vodafone Idea Merger) each hold 42% stake in Indus Towers Limited. Vodafone Idea Limited (Erstwhile Aditya Birla Telecom Limited) holds 11.15% stake in the Indus Towers Limited. Post Vodafone Idea Merger, the customer base for the Indus Towers has been reduced to only two telecom operators from three.

Bharti – Indus Merger

On 21 February 2020 DoT (Department of Telecommunications) approved the merger of Bharti Infratel (Subsidiary of Bharti Airtel) and Indus Towers Limited. The scheme of merger laid that after the merger the new entity will operate with the name of Indus Towers Limited (Hereinafter “Merged Indus Towers”). Under this merger, the Bharti Infratel will issue the shares of the new company i.e. Indus Towers Limited to all its shareholders including Vodafone Idea Limited. Further, pursuant to the merger the Vodafone Idea will sale its stake in the merged entity to raise the funds for the payment of its various dues. It is estimated that Vodafone Idea Limited can generate ? 45 Billion (? 4,500 Crore) from the sale its holding of 11.15% in the Indus Towers Limited (7% in the Merged Indus Towers). Post-merger the shareholding of the respective groups will be as follows in Merged Indus Towers:

(Data based on the Merger Scheme Document)[18]

However, with the ongoing delay in the merger, the net debt position and working capital of the Indus Towers is changing on a daily basis. The not so good performance of the Vodafone Idea in the third quarter of the FY 2019-2020 and the previous quarters has impacted indirectly to the net debt and working capital position of the Indus Towers Limited also (as Vodafone Idea and Bharti Airtel are the major and prominent customers of Indus Towers).

The Fall:

With the losing 14-year-old case against the DoT and considering the financial position of the Vodafone Idea, it is evident that the coming days for the company are going to very difficult. With the passage of every day the company is falling in the financial crisis as the Telecom Sector is also facing fall in the users and the competitors like Reliance Jio are capturing the market share with lightning speed. The Vodafone Idea’s collapse would impact government revenues pertaining to the AGR dues further it will create issue and uncertainty over the existing debt of spectrum charges[19]. If the company falls then it will result in the duopoly of service providers (with state-owned Bharat Sanchar Nigam Ltd as a distant third market participant), which will give an opportunity to the surviving operators to set higher prices due to less competition.

Further, the Bharti Indus merger will allow Bharti Airtel to enjoy the passive infrastructure at a lower price as deteriorated working capital and net debt position will result in lower share exchange ratio and lower share issue to its shareholders. This will happen because the current big customers for the Indus Towers are Bharti Airtel and Vodafone Idea. With Vodafone Idea gone the revenue of Indus Towers will fall drastically and it will adversely impact its financial position which in turn allow the Bharti Airtel to revise the Share Exchange Ratio at a much lower level. Further, lower share exchange ratio means lower payments to its shareholder and one of such shareholder is Vodafone Idea Limited[20]. Hence, Vodafone Idea’s weak performance is indirectly impacting its holding value in the Indus Towers and its future sale value of the investment in the Merged Indus Towers.

Also, due to limited players in the Telecom sector, it will be difficult for the Indus Towers to find another company to sell its then unutilised capacity which used to be consumed by Vodafone Idea. Hence fall of the Vodafone Idea will create unutilised capacity which the Indus Towers will not able to sell to any other operator for revenue. Currently, Indus Tower’s revenue is totally dependent upon the performances & survival of Vodafone Idea. Even after the merger, the condition is going to be same for the merged Indus Towers.

Further, the auditor's report of Indus Towers Limited also contained the said matter i.e.“Indus Towers Limited, a joint venture of the Company (“JV Company”), in its interim financial statements for the quarter and nine months ended 31st December 2019 reported that the JV Company’s two major customers in the telecom services industry impacted by the above SC AGR Judgement (refer note 4 above) contributed substantial and material portion of the net sales which resulted in significant and material part of the trade receivables due from these customers. Further, the loss of significant customer/s or the failure to attract new customers could have a material adverse effect on the business, results of operations and financial condition of the JV Company.”

From the Bharti Airtel’s point of view, the later the merger the cheaper price company will pay for the said passive infrastructure. Hence, fall of Vodafone Idea will not only help the Bharti Airtel to get the Passive Infrastructure for a cheap price but also will allow the operator to set a higher price in the market due to the duopoly that will come into existence after the Vodafone Idea’s fall. Hence, it can be said that the Fall of Vodafone Idea is the rise of Bharti Airtel.

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References:

[1] Refer https://dot.gov.in/sites/default/files/Network%20Status-%20November%202019.pdf?download=1

[2] Refer https://www.indiatoday.in/technology/news/story/reliance-jio-now-biggest-telecom-operator-by-subscriber-base-1637617-2020-01-17

[3] -do-

[4] -do-

[5] -do-

[6] Refer https://dot.gov.in/act-rules-content/2442

[7] Refer https://dot.gov.in/sites/default/files/UAS%20license-agreement-19-12-2007.pdf?download=1

[8] Refer https://dot.gov.in/sites/default/files/SC%20Main%20judgment%2024-10-2019.pdf?download=1

[9] -do-

[10] -do-

[11] -do-

[12] -do-

[13] Refer https://timesofindia.indiatimes.com/business/india-business/government-asks-airtel-vodafone-idea-others-to-pay-balance-agr-dues-without-delays-report/articleshow/74480117.cms

[14] -do-

[15] Refer https://www.ideacellular.com/content/dam/ideaselfcare/InvestorData/VIL-Annual-Report_2018-19.pdf

[16] Refer https://www.vodafoneidea.com/content/dam/vodafone-microsite/docs/pdf/investor-/results/q3-fy20/Unaudited-Accounts-Q3FY20.pdf

[17] Refer 4B of Unaudited Q3 Results of Vodafone Idea Limited https://www.vodafoneidea.com/content/dam/vodafone-microsite/docs/pdf/investor-/results/q3-fy20/Unaudited-Accounts-Q3FY20.pdf

[18] Refer https://www.bharti-infratel.com/cps-portal/web/pdf/Draft%20Scheme_MAY2018.pdf

[19] Refer https://www.livemint.com/industry/telecom/inside-the-battle-to-save-vodafone-idea-11583165208038.html

[20] Refer https://www.bharti-infratel.com/cps-portal/web/pdf/Reg30Update_on_merger.pdf