This is Vodafone-Idea’s best chance to pressure Narendra Modi

Sunil Jain
vodafone idea, bharti airtel, AGR woes, AGR dues, telecom AGR, adjusted gross revenue, Vodafone idea AGR, Reliance Jio

It is not clear what exactly the various telcos-like Bharti Airtel and Vodafone Idea-who have approached the Supreme Court asking for more time to pay their AGR dues are hoping to achieve; while Airtel owes Rs 36,000 crore, Vodafone Idea owes Rs 53,000 crore and Tata Tele Rs 14,000 crore. The government's demand for clubbing all telco revenues-like the interest on fixed deposits-under AGR was, to begin with, unfair and the Supreme Court badly erred in accepting this; how badly it erred can be seen from the fact that its judgment resulted in GAIL being asked to pay Rs 173,000 crore on its telecom revenues of Rs 35 crore.

Despite the obvious errors in the judgment, the Supreme Court rejected the telco plea to review the judgment. Astonishingly, the government never filed a review petition either, given the implications of the judgment. It was too much to expect the government to ask the Court to review its ruling since this supported what the government had been arguing, but since the ruling has brought the sector to its knees, some kind of relief was clearly needed. While the turnover of the Bharti Airtel and Vodafone Idea is around Rs 88,000 crore, they have to, between them, pay around Rs 90,000 crore.

And contrary to what some in the government argue, the telcos are not to blame for not provisioning this amount. No one expected to lose the case, and if the private firms were guilty of neglect, why didn't the PSUs MTNL and BSNL also not make provisions and why did the CAG never point this out? One reason why no one made provisions was that, till SC verdict, there was no final verdict on whether the government was right in wanting to include all revenues under the definition of AGR.

Also, as this newspaper has argued earlier, if the government had scrapped the license fees in 2010-it should have since it was charging market prices for spectrum since 2010 and the license fee system was begun when spectrum was mostly given free-the AGR dues would have been much smaller. Indeed, the Supreme Court was not even moved by the argument that, since it is only now that the SC has pronounced on the legitimacy of the government's definition of AGR, the dues could only apply to the principal amount and there could be no penalty or interest on this; the principal amount is just a fourth of what the telcos are being asked to pay right now.

Another reason why the government had to petition the SC even if it didn't want to help the telcos was that it was the biggest loser after the telcos. Vodafone Idea which has made it clear it will shut down if there is no relief from the government owes the banks-many of them, government-owned-Rs 49,000 crore and it owes the government around Rs 2.2 lakh crore. Apart from the AGR dues of around Rs 53,000 crore, it owes Rs 5,700 crore for what is called one-time-spectrum-charge and another Rs 157,750 crore of deferred payments for spectrum it had bought in the past.

Were the telco to shut down, the government will have to fight a legal battle to get the spectrum back since banks will argue they have first charge on it; this is precisely what is happening in the RCom and Aircel cases that are in the insolvency courts. But even if you assume the government wins the case eventually-how long it will take is unclear-it needs to reauction this in order to earn some money. With the industry in deep trouble-this is why there were no auctions in 2017, 2018 and 2019-it is not clear the government will earn anywhere near the money that Vodafone Idea had committed to pay.

In such a situation, when a firm which has invested over $50bn — $30 bn by Vodafone and $21 bn by Idea-shuts down, it will play havoc with the industry's investment climate; with the investment-to-GDP ratio falling from 34.3% in FY12 to 31.3% just before Narendra Modi first came to power, and to 28.8% in the first half of FY20, investors are, in any case, quite worried about making fresh bets.

In such as situation, it is not clear why a telco like Vodafone Idea has once again gone to the Supreme Court asking for more time to pay the AGR dues. Even if the Court concedes the plea and agrees that the government can decide the schedule of repayment, the telcos still have to pay the entire amount, and also interest on the dues. Indeed, had the telcos not fallen for the government's pay-in-20-annual-instalments plan when spectrum was being sold, the auction bids would never have sky-rocketed as the telcos simply didn't have the money to be able to buy such pricey spectrum. With low demand, the government and Trai would have reduced the reserve price for spectrum a long time ago; the government has earned Rs 3.6 lakh crore since 2010 via the auctions.

Given that Vodafone has already written down its entire $30 bn investment in India and Kumaramangalam Birla is on record saying there is no point throwing good money after bad, the telco, ironically, has never been on a stronger footing. If Vodafone Idea shuts down, the promoters lose nothing more than they already have.

Given that the telco will have to pay around Rs 8,200 per year (assuming a 10-year repayment schedule and a 10% interest rate) for the AGR dues, and its capex is much smaller than that of RJio and Bharti Airtel-that makes its network much weaker-it has very little chance of emerging stronger from the crisis, indeed even finding the money to be able to invest meaningfully in the network; the promoters being able to get back their sunk investments is a distant dream.

Ideally, if Vodafone Idea has to stay in the business, apart from a 10-20-year repayment period, it has to negotiate hard and get the government to at least scrap the license fees immediately. If Vodafone Idea shuts down right now, the government will be blamed for it. One or two years down the line, it will be treated as just another business that failed to make the cut.