View: Court errs grievously on telecom companies’ revenue share obligation

The Dredd Scott verdict of the US Supreme Court in 1857 held that black people were property and not citizens. The backlash precipitated the Civil War in 1861, which resulted, four years later, in the abolition of slavery and the extension of constitutional rights to all citizens regardless of race and colour. The 2019 Indian Supreme Court ruling on what constitutes the adjusted gross revenue (AGR) of telecom companies they have to share with the government is equally flawed but has no redeeming feature on the horizon: just destruction of India’s telecom sector, the best thing going for the country at the moment. If Vodafone-Idea goes bust, India will acquire the reputation for the worst policy framework for doing business, neve mind World Bank rankings.
The nub of the controversy is the licence condition telecom companies signed on to, when they moved from a fixed licence fee regime to a revenue-share regime in 1999. In the draft agreement which they accepted to transition from the fixed, and backbreakingly high, licence fee regime to one in which they paid as licence fee a share of their revenue with the government , the term adjusted, prefixing gross revenue, was meant to whittle the shareable revenue down to revenue arising from exercise of the telecom licence for which they were paying the fee. The government offered to consult the sector regulator TRAI while finalising shareable revenue. However, when the draft licence was converted to the final operational licence, the nuance was lost and the licence condition simply said a specified share of gross revenue.

Since 2003, the matter has been in dispute. Successive governments have argued in Court that the state is entitled to a share of the total revenue of telecom companies, even though TRAI and the sector’s appellate tribunal, TDSAT, have together laid down an exhaustive list of activities that could be deemed to be arising from exercise of the telecom licence. In October 2019, the Supreme Court finally gave its verdict on the dispute, focusing solely on the licence condition that the telcos stupidly signed on to, without going into whether that condition was arbitrary or not. The operational telcos have to pay cumulatively Rs 92,000 crore.

The Court refused to waive penalty and interest. It said companies must pay their dues in full. A review petition was dismissed. Today, while dismissing a plea asking for more time to make the payments, the Court fulminated over defiance of its directions. In particular, a government official at the Department of Telecom (DoT), who ordered freezing of the revenue collection till the companies’ plea seeking more time to make the payment was heard, came in for severe criticism by the Court. DoT has scrambled to forestall further judicial displeasure and ordered phone companies to pay their dues by midnight tonight.

Rs 92,000 crore to be paid, after banking hours, on a weekend, before midnight – just like that. Ease of saving one’ own backside is very much in evidence. Ease of doing business? What is that?

If a telco made treasury operations and made profits, these are now deemed shareable. If a telco made real estate transactions that resulted in capital gains, these are deemed shareable. The absurdity of these claims has been exposed by the AGR dues claimed on non-telecom companies such as GAIL, PowerGrid, OIL, etc. Together, these companies have been asked to pay a revenue share of Rs 263,000 crore, because these companies have a telecom licence, even if they do not offer telecom services to third parties. If these companies pay this revenue demand claimed on their gross revenues, on account of their holding a telecom licence that is incidental to their main business, these companies would go bankrupt. Presumably, the Court would be in good humour. At least they went bankrupt obeying the law.

Vodafone has already announced that it would not fund India operations any further. Without fresh money from Vodafone, Birla could pump in the nearly Rs 20,000 crore Vodafone-Idea has been asked to pay. Or he might not be able to. In which case, Bharti Airtel would have no one to share towers and other broadband infrastructure with. On the bright side, it would be easier to push up tariffs in a duopoy with Reliance Jio. What this will do to consumers and Digital India is another matter. Life is full of minor tragedies, in any case. Why make such a fuss over just one more?

The way around bankruptcy and total collapse of viability for the telecom companies is for the government to restrict its demand to a share of revenues generated by the operation of telecom services. That would, first of all, require the government to have the courage to make this call, and tell the public that, even if the Court says it is entitled to certain dues from companies holding a telecom licence, it chooses to forgo a large chunk of those revenues. The government has abandoned this option, asking telcos to pay up by midnight.

If the Supreme Court does not grant any relief to non-telecom state entities with an incidental telecom licence, again, it would be up to the government to exempt them from having to pay up any share of their non-telecom revenue.

It is for the government to find the courage and take the rational call. The Court has left it with no room for waffle – unless it wants telecom operators and other state enterprises to go bankrupt.

If either the government or the Court offers relief to non-telecom companies on their revenue share, telcos should be able to appeal to the Court to recognise their rights to equal treatment and non-discrimination, and demand that they, too, be allowed to restrict the revenue they share with the government to income from exercise of the telecom licence.

If no relief is forthcoming, Vodafone-Idea would be killed and India’s telecom market would have just two private players, Airtel and Jio, in addition to the state-owned duo, BSNL and MTNL. The Supreme Court delivered the first lethal blow to Indian telecom when it cancelled 122 licences in 2012, presuming illegality in allocation of licences that a lower court later failed to find evidence for, and asserting that auction was the only way to allocate natural resources, a claim annulled by a larger bench of the Supreme Court in response to a reference from the President of India.

Just as the sector has been stabilising and gearing for fresh investments in the 5G infrastructure that other countries have already started rolling out, the Court has now asked the telcos to make an unjustified, extortionate payment to the government, based on a technical, rather than substantive view of the licence terms.

To kill an industry that provides the connectivity infrastructure for the internet economy, all it takes is the majesty of the highest court of the land and an obtuse government that insists on killing the goose that lays the golden egg, locked in a race of fatuous indignation and beady-eyed greed.

The views of the author are personal.