An Era of Fixed fees and ₹17/min incoming calls
In 1992, the Department of Telecom (DoT) invited bids for licences for cellular service across the four metros, offering two licenses per metro. The growth was slow, and the market was largely underpenetrated, with teledensity (telephones per hundred people) at 2.3 in 1996. Of the 34 licenses that were issued by the government, 8 firms had defaulted by 1998.
The Bureau of Industry Cost and Prices (BICP) and ICICI conducted a study to understand the factors leading to the financial failure of these operators and both of them concluded that the primary reason was the inordinately high annual license fee imposed on them. The telecom companies were paying Rs 6,023 per subscriber to the government exchequer as annual license fees. Since the costs of services were so high, the incoming call rates for the customers were Rs 16.80 per minute, and a few rupees more for outgoing calls! Yet, the 22 operators in the market were saddled with losses of Rs 7,700 crore in 1999.
An Era of Deregulation and Exponential growth
So, the BJP government, led by Atal Bihari Vajpayee, decided to deregulate the telecom sector by shifting from a fixed annual fee regime to a revenue share licensing model, established within the New Telecom Policy, 1999 (NTP).
Under this new scheme, the Licence Fee and Spectrum Usage Charge were set at 8% and between 3-5% of Adjusted Gross Revenue (AGR) respectively. The policy also delineated the roles and powers of overlapping regulatory bodies like TRAI (Telecom Regulatory Authority of India), DoT (Department of Telecom) and TDSAT (Telecom dispute settlement and appellate tribunal.
This led to a huge reduction in the license fees that needed to be paid to the DoT, which allowed the telcos to both drastically reduce customer call tariffs and invest in creating a massive infrastructure, setting in place a flywheel of growth. By 2010, the teledensity in India had jumped from the measly 2.3% to a strong 70%+.
An Era of Competitive stress and Fines
The entry of Reliance in 2016, however, has disrupted the scenes quite a bit. Most telecom players in India have gradually wilted away post the entry, leaving us with three major players in the space today - Reliance Jio, Vodafone Idea, and Bharti Airtel. We have covered the recent happenings in the telecom space across multiple pieces here. The rise of Reliance had already strained the financials of our incumbent telcos. The fairytale came tumbling down further on October 24, 2019, when the Supreme Court of India upheld the DoT’s definition of what constitutes AGR. This was the culmination of a long-running feud between the government and the telcos which started in 2003.
According to the telcos, the government’s definition of AGR was too expansive and sought to include items like income from dividend and interest, capital gains, foreign exchange gains, handset sales, and property rentals. According to them, this revenue could have been generated by the telcos even without a telecom license. The DoT defended their decision by stating that the telcos might offer services free of cost to its subscribers in lieu of upfront deposits and make license-free revenue by earning interest on these deposits. After initially siding with the operators, the TDSAT reversed its stand resulting in the incumbents having to pay a total fee of 92,600 crores.
An Era of Recovery?
The pain that the telecom sector is in right now is common news. BSNL has been struggling to pay its employees since 2019. Vodafone-Idea and Airtel’s CEOs raised concerns about their businesses as a going concern with Vodafone writing down the value of its 44.3% shareholding in Vodafone-Idea to zero.
The firms have now started working towards increasing the revenue per customer, a move that started after Jio hiked tariffs afters quite a few years of focussed market share expansion. Negotiations have also been on regarding a price floor and better terms on the AGR payment. In an environment of slow GDP, stress on a few private sector banks, and the impact of the coronavirus, the government will also be keen on reducing the impact of a blowup of a telecom player. An adverse impact on Voda-Idea puts 30,000 crore loans at risk - something that everyone wants to avoid.
To prevent a once booming telecom sector from regressing to a pre-2000 era, the Government will have to take proactive steps. The Union Cabinet of India approved a two-year moratorium on payment of pending spectrum auction installments for telecom operators in December 2019. A middle ground on the AGR fee via leeway on penalties with a longer runway for payment will help the sector gain some strength and stability. This is important not only for the competitive intensity of the sector and the financial health of the banking system, but for a smoother transition of the country and our tech into the 5G era as well.
About the Author: The post is writen by our EZPP Partner Abhirup Roy with relevant edits from our editorial team. Abhirup is a graduate from IIM Ahmedabad and works with Zolo Stays.