How the telecom mess got messier

Telecom was already neck-deep in a crisis. The Supreme Court’s (SC) judgment on gross revenue (GR) has brought the sector to its knees. The SC’s judgment is based on: (i) the licence agreement (LA) is a contract; (ii) the definition of GR, a contractual term, is binding; (iii) the parties entered into the contract willingly; (iv) res judicata bars continued litigation of settled issues. 

The Court ruled that the dispute could not be termed “bona fide”. The telcos merely raised “frivolous” objections. The payment of “interest, penalty and interest on penalty” was upheld because: (i) “it was as per the agreement”; (ii) the “ contract…. is voluntary on both sides and binding and cannot be termed to be unfair” (iii) the terms were fair (not “oppressive”) because the government was not “in a dominant position or possessed wholly disproportionate and unequal bargaining power”. Further, the transition from a fixed licence fee (LF) to a revenue sharing arrangement was a great “financial booster” and “extremely beneficial” to the licensees.

Did the telcos have any choice regarding the LA (contract) in 1999? Not really. The fixed LF was too large and could not be paid. And, if they did not migrate to the new regime, the thousands of crores invested would be totally lost. Did the parties to the contract have comparable negotiating power? Not by a mile. The fact is that the Department of Telecommunications (DoT) had the telcos over a barrel; ask anyone familiar with the history. So was the contact “voluntary” and were the terms not “oppressive”? Seriously doubtful.

Illustration: Ajay Mohanty

 

The long-running litigation dates to 2003 barely 18 months after the government finalised the concept of GR. The industry never accepted this as fair. An expert body, the Telecom Regulatory Authority of India (TRAI), has consistently found merit in the telcos’ claims. The Telecom Disputes Settlement and Appellate Tribunal (TDSAT), headed by eminent SC judges, has also repeatedly ruled in favour of the telcos, even after the SC’s 2011 ruling. This lends credence to the claim: (a) there was a genuine dispute; (b) exclusion of certain elements from GR was the fair thing to do. 

Final comment: Till 2011, the SC perceived this as a bona fide dispute. So, if penalty and interest on penalty have to be paid, should they not be limited to amounts due from 2011? 

The draft on telcos’ revenues has been a long-standing issue. Consider the following: The levies in India — LF and SUC or spectrum usage charge— are the highest in the world and no other country levies a SUC. The government gained hugely from the revenue-sharing arrangement; estimates suggest that the net present value of the LF/SUC exceed the fixed LF abandoned in 1999. The National Telecom Policy 2012 stated that the LF/SUC regime would be “rationalised” — a euphemism for a reduction in the rates. Sadly, nothing has been done in all of eight years. In 2013, TRAI specifically recommended a reduction of the SUC; again, no relief for the sector. The licensor changed the “contract”: Spectrum was to be auctioned, and LF/SUC still had to be paid. Did the licensee have any choice but to sign the new contract? In the changed circumstances — auction of spectrum, financial stress, growing indebtedness — TRAI (2015) sent recommendations to the government on how to redefine GR. To ensure easy verifiability (with minimal discretion) a positive list was drawn up of those categories of revenue that would be excluded from GR. Five years on, there is no decision from the government, neither rejection nor acceptance.

Finally, the judgment raises some troublesome questions. How to recover dues from firms that have exited or are now in bankruptcy? If not, would it be fair to recover dues only from those in business? Or, drive them into bankruptcy? To further complicate matters, demands now have to be raised against Delhi Metro, GAIL, Power Grid and Oil India. Dues now have to be determined on the basis of their GR. Should a gas distribution company’s total revenues be used to determine its telecom dues? This is precisely the problem that the TRAI report of 2015 sought to preempt. If dues from these companies (Rs 2 trillion by reported estimates) are to be waived, is that not a “presumptive loss”? And, if they are collected, do these companies also go bankrupt?

The government’s fiscal greed and policy inaction have brought India to this pass. LF/SUC revenues were the highest inflow under non-tax revenues (till the Reserve Bank of India surplus/reserves took over).  Universal Service Obligation Fund (USOF) money was never used for universal service; most of it was used to fill a huge budgetary hole. The controversial SC judgment of 2012 (the 2G scam) led to decision paralysis in the DoT. Officers were and are scared silly. Despite all the warning signs, the response was stoic inaction.

So, is there a way out? First and foremost, recognise that we are dealing with issues of solvency. AGR dues of Rs 1.47 trillion are a huge burden. Tinkering will not do. Merely staggering spectrum dues comes nowhere near solving the problem. Here’s a to-do list. First, accept TRAI’s recommendations of January 2015; use the positive list of exclusions to ensure ease of use and verifiability. Second, reduce the rate of LF and SUC to 5 per cent  and 2 per cent, respectively. Third, waive the penalty and interest on penalty; for reasons explained above this levy is plain unfair. If not, at least limit it to dues from 2011 onwards only. Fourth, the reckless price war in the industry must end. TRAI should have never allowed things to go this far; put in place a floor price for calls and data. 

When a decision has such far-reaching implications for the economy — the sector, banking, foreign investment — perhaps the SC could suo motu review its decision. In this author’s humble opinion, many points brought up here have not adequately been presented to the Court, else it may have ruled differently.

Recall Walter De La Mare: “Oh pity the poor glutton/ Whose troubles all begin/ In struggling on and on to turn/ What’s out into what’s in”.

The writer is former chairman, Telecom Regulatory Authority of India