Telecom Tumult

A couple of weeks ago, India’s Supreme Court rattled the top telecom operators in the country by ordering them to pay billions of dollars in unpaid spectrum and licensing fees. The court set a deadline of 17 March, the date of the next hearing, and warned operators that if they miss it, they will face penalties. It also threatened to hold the companies and officials in contempt for failing to implement a ruling from October 2019 that required them to pay dues of $13 billion related to their licence fees.

The long-running row between the government and the big telecom companies has centred on adjusted gross revenue (AGR), debating on how licence and other fees paid by the companies should be calculated. AGR has been a thorny topic since 1994, when the government stipulated the payment of an annual fixed licence fee in exchange for telecom licences issued to operators. Operators have argued that the fees should be based on income from only their core telecom business, but in a final ruling in 2019, the Supreme Court ruled that they should be calculated on the amount earned from all business dealings, including handset sales and other income.

Vodafone Idea has been hit hardest by the AGR payments, now owing the government about $7 billion in AGR dues. It has threatened to close its India operations if it doesn’t get more time to pay its dues. During a recent call for analysts to discuss its results for its fiscal 3Q19/20, Vodafone group CEO Nick Read branded the situation as “critical”. He called for an immediate two-year moratorium on spectrum payments, a lowering of licence fees and taxes and the waiving of interest and penalties relating to the AGR.

Bharti Airtel owes close to $5 billion, which it has decided to pay by the March deadline. Reliance Jio, a relatively new entrant to the telecom sector, doesn’t owe any licensing fees, so it’s watching the drama unfold from the sidelines. In fact, it was Jio’s market entry and aggressive pricing tactics that forced rivals to slash prices, denting their profit margins and leading to consolidation in the sector.

A collapse of Vodafone Idea would have wide implications across sectors, jobs, the broader Indian economy and the global perception of India. This would bring pain not only on the telecom sector, but also on many others including banking. The country’s banks have already been struggling with a spate of bad loans and non-performing assets, estimated to be worth nearly $140 billion. They will face another huge hit if Vodafone Idea is forced into bankruptcy, as the operator’s debt to them is worth more than $4 billion.

The Indian government needs to tread carefully as the ripple effects from the fallout will be felt on the overall economy, through debt default, job losses and millions of subscribers being forced to switch to the remaining two operators. The ramifications of the court’s decision will be long-lasting, reducing competition in the market by altering “the rule of three” by a third.