Telecom's Lost Cause

India's telecom operators were hoping against hope. But the March 18 order of the Supreme Court gave them no route for escaping AGR (adjusted gross revenues) liabilities. The court even came down heavily on them for self-assessing the dues instead of straightaway paying the amounts it had fixed in an earlier order. It was the second time the court had rapped telcos and the DoT (Department of Telecommunications) for not obeying its orders. It said telcos had done serious violations and were liable to pay the entire amount they owed to the government. "We see that attempt has been made to scuttle the effect of order of this court and that is a gross violation of the order of this court by entering into a process of self-assessment/re-assessment that is virtually reopening of entire dues, that kind of exercise is not at all permissible and is tantamount to sitting over the order of the court," said the three-judge bench, headed by Justice Arun Mishra.

Vodafone Idea, Bharti Airtel and Tata Teleservices had done their own assessments of AGR dues and submitted the amount to the DoT. Vodafone Idea deposited Rs 6,854 crore in three tranches based on the self-assessed liability of Rs 21,533 crore, way short of the DoT's provisional estimates of Rs 58,254 crore. After the court order, it is clear Vodafone Idea will have to deposit the entire amount (that is Rs 58,254 crore), which would potentially jeopardise its future. So is the case with Airtel, which has been asked to pay Rs 43,980 crore against its own assessment of Rs 13,004 crore (see Duel Over Dues).

"After this decision, incumbents continue to face headwinds and stand at the same position as they were when the new definition of AGR was accepted," says a March 23 report by CARE Ratings.

Although the court told the government that it will consider giving relief to telcos in the next hearing (which was fixed for two weeks from March 18), telcos have to pay the dues as per the DoT's calculations - either lumpsum or in annual instalments over 20 years. If telcos are supposed to pay the entire amount - Rs 1.69 lakh crore - upfront, in all likelihood, it would lead to duopoly, and in the worst case scenario, monopoly in the sector, with depleted state-run BSNL-MTNL combine. Besides, there will be serious repercussions for consumers, banking and ancillary telecom businesses in addition to government's revenues and India's image as an investment destination. "The difference between the DoT's demand and telcos' self-assessed amount is huge. I don't think any of them have the appetite to pay upfront. It's going to be pretty bad situation for Vodafone Idea particularly," says Harsh Walia, partner at law firm Khaitan & Co.

How the Telcos Messed Up

Soon after losing the AGR judgment, telecom companies approached the DoT seeking a relief package from the government. The government did listen to them and formed a committee of secretaries (CoS) in late October to come up with measures to prevent a collapse of the sector following the AGR judgment. The committee, reportedly headed by the Cabinet Secretary, suggested a half-hearted step, and based on it, the government announced a two-year moratorium on spectrum payment due for 2020/21 and 2021/22. This Rs 42,000-crore relief would ensure easing of telcos' liquidity for the immediate future.

Meanwhile, telcos kept hoping that they would get some relief from the court. But that didn't happen. On three different occasions, the court has taken a strict view against them. In January, the SC rejected the review petition, which was followed by the apex court's rap on their modification plea in February. This was followed by the March 18 order.

In a conversation with Business Today, Rajan S. Mathews, Director General of COAI (Cellular Operators Association of India) said that the telcos' demands were in line with the DoT's 12-point application filed with the Supreme Court. Experts say that the current approach of telcos seems to be wrong. They should have taken their own path rather than aligning with the DoT on this issue.

"Instead of combining forces with the DoT, telcos should have challenged the DoT demand in court. Our demands were in line with the 12-point application filed by the DoT in the Supreme Court recently. Instead, they deposited the amount, and approached the court for succour. Remember these entities fought fiercely tooth and nail against each other for 14 years. Suddenly they are on the same side. This would seem like a waste of time and resources that could have annoyed the court," says a large equipment maker executive.

It's Complicated

So while the DoT seems to have realised that upfront AGR payments could result in a high level of distress in the sector, the way it is handling things is likely to create confusion going forward. The DoT's application in court said all licensees be allowed to pay the "unpaid amount" (total dues minus amount already paid) in annual instalments over 20 years at an interest of 8 per cent. "Interest on the unpaid amount, penalty and interest on penalty to the past dues ...will not be levied beyond the date of the said judgment [October 24]," the DoT application said.

It seems the idea to stagger the dues over 20-year instalments hasn't been thought through. Why? In India, there are 22 telecom circles, and telcos like Airtel and Vodafone Idea hold licences (and spectrum) with different validities across these circles. If the DoT is proposing a staggered payment option for telcos, these annual instalments will be paid circle-wise. What will happen to dues if a licence is expiring before 20 years? According to brokerage Motilal Oswal, 57 megahertz (MHz) of Airtel's spectrum in eight circles, including Tamil Nadu, is expiring in September 2021. It will cost Airtel about Rs 12,000 crore to renew this spectrum at previous auction rates.

"If the staggered payment plan is approved, telcos will get a lifeline but will continue to operate under financial duress. Their balance sheets would be stretched, and telcos might be constantly evaluating all options on the table, including exiting some less-profitable circles. What would happen if a telco fails to clear dues in a particular circle, and exit? Can the DoT take action against it by revoking licences in other circles? All these modalities would have to be worked out," says a sector analyst.

Losing Hope

While the DoT's AGR demand is applicable to 15 operators, 70.4 per cent has to come from just three operators - Vodafone Idea, Airtel and Tata Teleservices. Some penalised operators have already shut shop, including Loop Telecom, S Tel and Etisalat DB Telecom, while others like Reliance Communications, Aircel and Videocon Telecom are going through insolvency proceedings.

It seems Airtel is the best placed among the lot to repay dues whereas Vodafone Idea is in the worst situation with highest AGR dues and losses piling up for over three years. Recently, some reports suggested that promoters of Vodafone Idea could infuse $1.5 billion into the company if the self-assessments (of AGR dues) are accepted and repayments are allowed over several years. But after the recent order, there's no room for telcos to negotiate dues; it's just a question of how and when they have to pay up.

In January, Airtel raised $2 billion in QIP (qualified institutional placement) and another $1 billion by issuing FCCBs (foreign currency convertible bonds) to pay the dues. Marquee investors like GIC, Temasek and Warburg reportedly subscribed to Airtel's QIP highlighting their long-term optimism for the telco. Vodafone Idea, on the other hand, suffered another setback in February when Bharti Inftratel (the tower arm of Airtel) announced extension of the date of its merger with Indus Towers, which is the largest towerco in the country with 125,649 towers. Bharti Infratel and Vodafone India hold 42 per cent each and Vodafone Idea holds 11.15 per cent in Indus. Vodafone Idea had plans to sell its stake after the merger to generate about Rs 4,500 crore for its core mobile business. E-mail queries sent to Airtel and Vodafone Idea didn't elicit response.

It seems options for Vodafone Idea are limited. Unless promoters decide to bring in fresh capital, help from other quarters is highly unlikely. Banks, for instance, will unlikely lend to it as they are already saddled under huge non-performing assets (NPAs). State Bank of India alone had NPAs of Rs 12,165 crore as on December 2019 in the telecom sector. Besides, the financial condition of Vodafone Idea is stressed, which will make it difficult for any investor/lender to justify fresh funding to the company. In the third quarter 2019/20, Vodafone Idea's gross debt, excluding deferred spectrum payment liabilities of Rs 88,530 crore, stood at Rs 27,320 crore, with cash and cash equivalents of just Rs 12,530 crore.

5G Goes for a Toss

Even as the world grapples with coronavirus and Indian telcos struggle with AGR dues, the biggest casualty is likely to be 5G auctions. The manufacturing units and supply chain of large equipment makers - Ericsson, Huawei, and Samsung - have been reportedly hit by the lockdown in various countries. The government has been delaying the 5G spectrum auction and trials dates for several months now. Last September, telecom minister Ravi Shankar Prasad had said 5G spectrum auctions would be conducted in end-2019 or early-2020. Recently, operators submitted their trial proposals to the DoT but the government is yet to take action.

China, which is expected to lead the market with mass-scale production of affordable 5G handset/equipment, has stopped production lines, which will push the 5G launch forward by a few quarters if not a year.

Even if the government decides to hold the auction this year to plug the revenue shortfall owing to coronavirus, the participation will be low. Already singed by the AGR crisis, telcos will find it unviable to buy exorbitantly-priced spectrum. For instance, the base price of the 5G spectrum (in 3300 megahertz to 3600 megahertz band) is highest in India. At telecom regulator TRAI's recommended reserve price of Rs 492 crore per MHz, operators will have to pay around Rs 50,000 crore for 100 MHz pan-India spectrum - thats the minimum spectrum required to deliver 5G services (in sub-6000 MHz bands) as per global body ITU.

The Last Resort

So, what's the way out for telcos? Analysts say that in the larger interest of the sector and consumers, telcos could be given a last option of paying the dues over a period of time. "Whenever there's a logjam between the government and the court, the government typically makes changes in existing laws to wriggle out of the situation. That could happen in telecom also - in what form is still unknown. But at the moment, the staggered payment option is the only way to save telcos," says Khaitan & Co's Walia.

@manukaushik