Rebuilding Telecom Business in India

Rebuilding Telecom Business in India

Subhash Chandra Garg

Fluctuating fortunes of Telecommunication Business in India

Telecom business is broken again in India.  

Cellular telecom business in India was born in failure in 1995 when 14 companies bid for mobile service licences on atrociously high fixed licence fee basis (spectrum came bundled with licence). These were the days when a call on cellular phone cost over Rs. 16 per minute. Annual fixed licence fee was calculated at the auction determined fixed licence fee or @Rs. 6000 per subscriber, whichever was higher. Almost all companies defaulted on payment of the licence fee. The Government took a big courageous decision in 1999 and allowed the telecom companies to migrate from fixed licence fee regime to revenue share based licence fee regime.

The decision transformed the fortunes of the industry. Falling technology prices contributed further. Cost per subscriber declined massively as the subscriber base grew by leaps and bounds. By 2001-02, telecom companies had started reporting profits. The subscriber base was increasing in geometrical proportion every year. All these made, the telecom licences excessively valuable. Share prices of the telecom companies galloped Some of the telecom licences could sell their stakes raking billions of dollars in profit. Stinking profits made by some operators gave birth to scandals and scams. These scams would disrupt the industry when the Supreme Court cancelled 122 2G licences in 2012 making several companies (including a number of foreign investors) lose billions of dollars paid in licence fee and investment made in putting networks.

Prices of voice calls had started drifting lower from 1999 itself. From 16 rupees a minute to 6 rupee a minute to 2 rupees a minute to virtually zero by 2016-17 after the new big player Jio entered the market, voice, which was the bedrock of profitability of telecom companies, started contributing almost nothing towards revenues from 2017. Data became the principal contributor of revenue. Yet, the Average Revenue Per Unit (ARPU), which was about Rs. 1600 in 1998 got down to only Rs. 72 per month in March 2018. Profitability of the telecom companies tanked.

Over the period 2009-2019, all the private telecom companies, barring the three Jio, Airtel and Vodafone- Idea abandoned the telecom operations. The Government entities- BSNL and MTNL – are also a pale shadow of what these were in their heydays, with less than 7% of the actual operational market share in November 2019.

The saviour of 1998- the revenue sharing regime- is ironically proving to be the reason of their big woes now. Telecom companies did not pay licence fee and spectrum charges on what they claimed was the non-telecom revenues, whereas they had signed on paying these fees on the entire gross revenue adjusted only for three items (inter-connection charges paid to other service providers, roaming charges paid to other service providers and the service tax collected). These arrears now, along with penalties and penal interest, are estimated to be about Rs. 1.47 lakh crore.

While the telecom service has become almost universal in the country and the prevailing tariffs in India are possibly the lowest globally, the businesses which deliver these services are quite broke. The telecom business is in bigger crisis that it was in 1998. Vodafone-Idea is sitting on the edge of precipice- to get into the ditch of bankruptcy any day.

Present Telecom Business Crisis in India

Telecom crisis in India is not limited to AGR related issues connected with one of the three surviving companies. The crisis is much larger and deeper.

There are four major dimensions of the present telecom crisis in India.

First, Telecom business- voice and data both- is headed towards becoming a duopoly (Jio and Airtel) with the remaining two players- Vodafone-Idea and BSNL-MTNL hurtling towards eventual shutdown, which might as well be an abrupt collapse. This has enormous consequences for over 400 million of the customers of Vodafone-Idea and BSNL-MTNL in terms of continuous availability of telecom services and also for competitiveness in the industry itself.

Second, all other telecom licensee companies- Reliance, Aircel etc.- have closed the shop already and are mostly in insolvency proceedings. Their networks and spectrum licences are getting wasted and are not being put to any active service. They are not paying their dues towards Government as well.

Third, The Government has proposed to put in billions of dollars (over Rs. 70000 Crore) to ‘revive’ BSNL/MTNL. With the country facing massive economic slowdown and fiscal situation being very tough, is it at all advisable to spend so much money for a revival which is unlikely to happen and would leave the country only with a massive bill.

Fourth, telecom technology continues to advance. 5G, which has the potential to connect machines and deliver much faster digital services which were not even possible to be delivered earlier, has arrived. It would leave country behind by decades if India were not to get on to the 5G bandwagon on account of illusory reserve price fixation.

All the four issues need to be resolved in the larger interest of the country.

Duopoly and Competitiveness

Finances of even the most profitable telecom company Airtel started deteriorating in 2017 when its total consolidated revenues came down from Rs.96,532 Crore to Rs. 95,468 Crore. Total revenues fell drastically in 2018 at Rs. 83,688 Crore- a loss of about Rs. 12,000 Crore. Effect on Net Profit was more drastic which came down from Rs. 6,077 Crore in 2016 to Rs. 1,099 Crore in 2018. Earnings Per Share fell from Rs. 15.21 in 2016 to 9.51 in 2017 to only 2.75 in 2018. The company slipped into consolidated loss in June 2019 quarter. With Supreme Court Judgement in the Adjusted Gross Revenue (AGR) case dealing the final blow, the consolidated profits turned into a whopping loss of Rs. 23,145 Crore in September 2019 quarter.

Situation of Vodafone-Idea is the most delicate. The Company reported consolidated net loss of Rs. 4168 Crore in 2017-18, which widened to Rs. 14,604 Crore in 2018-19. The Company continues to report losses every quarter in the current financial year with consolidated quarterly losses at Rs. 50,922 Crore in the September quarter following the AGR judgement virtually wiping out the entire Net Worth of the Company. With Supreme Court sticking to the AGR judgement, it seems virtually the end of the road for the Vodafone-Idea.

Vodafone-Idea is quite unlikely to be able to pay-up the AGR related dues. Even if the Company somehow manages to do so (making other capital contributing companies sick in the process), it has no money to make investment in 5G or even upgrading the 4G network. Vodafone-Idea lost whopping 3.64 crore subscribers in the single month of November 2019. It has lost over 6 crore subscribers in first nine months of 2019. It would be no surprise if Vodafone loses a total of 10 crore subscribers in the year 2019-20. Very clearly, it is not going to survive unless something is done.

The duopoly of Jio-Airtel would not be in the interest of country. India needs a healthy and competitive telecom sector. It would be in national interest if Vodafone survives as a strong player. There are two options to ensure this.

One, admittedly, the Supreme Court could not have given any other judgement in the AGR case in the face of facts and circumstances of the Case. The licence conditions prescribed very clearly that barring three specific revenues/receipts, every other revenue has to be counted as part of the AGR. The Supreme Court could not have excluded the revenues which Telcos wanted to be excluded (dividends, lease rentals and other revenues not connected directly with the telecom service) in the face of water tight licencing agreements. Similarly, it is difficult for the Court to eliminate or reduce the penal interest and other penalties which are otherwise leviable as per the conditions of the Licensing Agreement. Pleadings in the Supreme Court for reducing AGR liabilities, therefore, do not appear to the right solution.

Licence conditions are determined by the Government. The penalties etc. are levied and recovered by the Government. The Government, from time to time, revise and have revised the licencing conditions. The Government, also from time to time, come up with Schemes to settle the dues/arrears and penalties. Vivad Se Viswas Scheme is an example, where a part of the tax claims is being waived off, along with penalties and penal interest. The same logic can be applied for telecom overdue/ arrears. The Government can offer the Telcos, including the entities which have shut shop or are in IBC resolution process, a Scheme to pay the principal dues with the penalties and penal interest etc. waived off. This is the solution One,

Second, The Government can consider appointing a Board headed by an experienced telecom chief executive, using its power under the Companies Act (as used in case of IL&FS and DHFL), by ousting the current Vodafone-Idea Board. Along with Board replacement, the approval of NCLT can be sought for placing a moratorium on Vodafone-Idea loans and dues from lenders, including the Government dues, for some time. This would provide a much-needed breather to Vodafone-Idea (but not to their promoters who would be out) and the Company can then be nursed back to health (fundamental telecom business still is quite profitable with some upward revision in rock bottom service rates). After sometime, the Company can be sold to a new private sector player.

Any of the above two solutions will preserve the competitiveness in the sector, besides saving the nation such a massive cost of disruption. These would not require any fiscal give-away as well.

Telecom Companies in Insolvency Proceedings

All the companies, other than the three- Jio, Airtel and Vodafone-Idea- have either shut shop or are in insolvency process or are fighting cases against the Government in Courts or international Tribunals. Erstwhile telecom majors like Reliance Communications and Aircel are in insolvency process. The spectrum blocked with these licences is neither being used for providing services to people, nor is it being transferred to operating companies. The Government is also not getting any revenue from these licensees- either the instalment of capital payments for spectrum or the revenue share- based fee for licence and spectrum use. There is substantial national waste of precious resource.

Primary reason why the spectrum held by these insolvent companies is not being sold/transferred to the operating telecom companies is that the licencing conditions, as interpreted, require the company selling the spectrum to account for all the capital payment received for sale of spectrum as revenue (part of AGR) and then pay licence fee and spectrum charge thereon. This increases the cost for the buying company as well.

If the Government were to permit sell of spectrum and allow only capital gains, if any made, to be counted as revenue, there would be sale of entire jammed spectrum and the Government would also receive licence fee and spectrum charges from the buying entity on the revenues earned with the use of this spectrum.

Dealing with BSNL-MTNL

BSNL-MTNL duo is already on death bed. Active Wireless/ mobile telephone subscribers in India (VLR data) at end September 2019 were 96.09 Crore. As the active subscribers of BSNL was only 55% and that of MTNL only 29%, the active subscribers of BSNL were only 6.44 Crore and that of MTNL only about 10 lakhs. The duo of the public sector telcos together had a princely share of only 6.71%. The BSNL-MTNL are offering largely 2G services and consequently their ARPU is also very low. It was no wonder that BSNL reported a loss of over Rs. 14000 Crore on the revenues of Rs. 19,300 Crore in 2018-19. MTNL, the listed company, MTNL reported net loss of Rs. 1069 Crore over a turnover of Rs. 384 Crore for the December 2019 quarter. MTNL’s loss has been higher than the turnover for many quarters now.

The Government announced a ‘revival’ package of Rs. 69,000 in October 2019. The Budget 2020-21 makes provision of Rs. 37,640 Crore for providing Support to BSNL and MTNL, including Rs. 14,115 crore of equity infusion in BSNL and of Rs. 6295 Crore for MTNL. Further provision is for Ex-gratia payment to voluntary retiring employees of BSNL/MTNL of Rs. 9860 Crore and Rs. 3295 Crore. The Government is also providing Rs. 2541 crore and Rs. 1133 Crore as grant-in-aid to BSNL and MTNL respectively for payment of GST on the 4G licences.

Private telecom companies are getting crushed under the weight of AGR related demands and public sector companies are crushing the Government under the weight of their accumulated losses and for making what would be largely an infructuous new investment. There is virtually no likelihood of these two companies garnering even 1/10^th of the market share of the telecom market. These are terminally ill and sooner than later will have to be put to rest.

Only justification provided by the Government publicly for such a massive ‘revival package’ is that these two companies are ‘strategic’. No more details of what kind of ‘strategic’ interest these two companies are serving and why a revival package of Rs. 70,000 Crore is the right strategy to serve this strategic interest have been provided either. It is difficult to think of what such a strategic interest could be. If it is providing some secure lines of communications to Government officials, there are surely several other better technical solutions which can secure this strategic interest at a fraction of the cost of proposed investment.

A good part of the revival package is to be funded from sale of land and building assets of the BSNL and MTNL. Government’s track record of selling land is very dismal. It is quite unlikely that BSNL and MTNL land and buildings would get sold. The re-capitalisation package of Public Sector Banks had a component of sale of non-core assets like the asset management companies, housing loan companies etc. Despite two years having gone, not a single such non-core company, which is relatively much easier to sell than the land and buildings, has got sold. It is more likely that soon these two Companies would knock at the door of the Government to fund what the land and building sale was to fund. Is it worth investing Rs. 70000 Crore of taxpayers’ money for retaining a few crore 2G connections with PSUs- BSNL and MTNL. These subscribers could very easily migrate to other telecom companies, without incurring any cost at all.

A major element of the revival package is that these two companies will create network for 4G and then acquire new customers. 4G networks were built by the competitor private sector companies quite some time back. These are deeply entrenched and way more efficient that what BSNL-MTNL would ever build. It would take some time for BSNL-MTNL 4G network to come alive- it may not actually happen. Even if it happens, the chances of BSNL-MTNL acquiring customers of other three players are next to nothing.

In view of this, it makes sense to abort the revival plan- most specifically the part relating to creation of new 4G network. Whatever strategic network is required to be created, it can be done with the other telecom companies in the most secure manner.

Auctioning 5G

The TRAI has recommended reserve prices for 5G spectrum. Various estimates are floating about the kind of funds the industry will have to come up with for taking all the spectrum on offer. Some estimates place it in excess of a couple of lakh crores.

Considering the potential revenue which 5G telecom spectrum can generate and considering the morass in which the telecom industry is, only one of the three players seem to have indicated interest in buying 5G spectrum. If the auction attracts one bidder, this is no auction at all.

Principal advantage of 5G spectrum would be the expansion of digital economy. Lot of services which are not possible to be delivered today would be digitally delivered with the use of 5G spectrum. 5G telecom spectrum will build digital expressways/super highways. Future economy, the digital economy, will be built on these digital super highways as in the last century the analogue economy was built on roads and highways. The best way to protect revenue, in current circumstances, is also to link the spectrum charges to the revenues which 5G spectrum and licence would generate for the telecom companies. In view of the massive infrastructural role which 5G spectrum will play, ti might be worthwhile to allocate the 5G spectrum at a very low capital/one-time cost- somewhere close to one tenth/one-fourth of the reserve price recommended by TRAI. Such an arrangement would serve the national interest and Indian economy much better.

CONCLUSION

Four recommendations:

1.    Offer a one-time settlement scheme to the telecom companies (both operating and under resolution) to pay the principal due amount as per the AGR definition as contained in the licencing agreements and waive the penal interest and penalties. Alternatively, appoint a Board for Vodafone-Idea by ousting current Board on the lines of action taken in case of ILFS and DHFL and secure a moratorium of some time on servicing of loans and government dues.

2.    Encourage transfer of the spectrum stuck up with the telecom companies which have shut shop or are in IBC process (e.g. Reliance Communication or Aircel) by not levying any AGR based fees on the capital value of spectrum sold.

3.    Abort the revival plan of BSNL and MTNL. There is no advantage in sinking so much of the tax-payers money in creating a new 4G network for BSNL and MTNL. It will save precious fiscal resources.

4.    Allocate 4G spectrum at a fraction of the reserve price recommended by TRAI. Let the companies invest in creating 5G networks. The Government can get its due share in the form of revenue share from the telecom related revenues which 5G network would generate.

SUBHASH CHANDRA GARG

NEW DELHI 19/02/2020