India court decision a massive blow for telcos

In a huge blow to the Indian telecom sector, authorities are demanding around 920 billion Indian rupees ($13.9 billion) in license fees, penalties and interest payments from the country's operators following a recent Supreme Court decision.

Bharti Airtel will accordingly need to shell out more than $3 billion, Vodafone nearly $4 billion and Reliance Jio -- which started operations only about three years ago -- around $1.8 billion. The telcos have asked for a minimum of six months to make the payments.

The court ruling stems from what is known as the adjusted gross revenue (AGR) case that dates back around 15 years. At issue is whether revenues from non-telecom-related activities should be included in the definition of AGR under telecom license conditions. Private-sector operators argue they should not. The government says they should and that operators therefore owe more in licensing and other fees. India's highest court has now taken its side.

The latest ruling will be an additional unwelcome ruling on Bharti Airtel and Vodafone Idea, which have been running losses for several quarters. It may even impact their network expansion or modernization plans, indirectly affecting the vendors as well. Operators have already complained about pricing levels during India's upcoming 5G spectrum auction. Additional AGR payouts seem bound to hurt.

The order has huge ramifications for Vodafone Idea, whose survival is even at stake. At around $4 billion, Vodafone Idea's total license fee, including interest and penalties, would wipe out its entire cash balance of INR210 billion ($2.9 billion). Vodafone Idea also has a massive debt of $14 billion.

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"Clearly this judgment has significantly damaging implications for India's telecom industry, which is already reeling under huge financial stress and is left with only four operators. Significant investment of several billion dollars has been made in creating world-class networks. Today's order has huge impact on two private operators while most of the other impacted operators have exited the sector. We urgently request that the government engage on this matter in order to find ways to mitigate the financial stress for the industry," said the operator in a statement.

Bharti Airtel has made similar noises. "The government must review the impact of this decision and find suitable ways to mitigate the financial burden on the already stressed industry," it said in its own statement.

Were Vodafone Idea to vanish, India would be left with two private-sector operators (RJio and Bharti Airtel), with the government-owned BSNL-MTNL as a potential third player. Share price movements seem to reflect these concerns: Vodafone Idea's shares fell as much as 26.6% on the National Stock Exchange after the court announcement, while Bharti Airtel's rose 3%.

Vodafone Idea has indicated it may push for a review of the judgement. "We will study the ruling as soon as it is available, along with our legal advisers, to determine next steps. If there are technical or procedural grounds for doing so, this could include a Review Application," it said.

The question that really needs to be asked is what India's government would gain from even more consolidation? Reliance Communications and Aircel have already disappeared and authorities would struggle to extract any AGR payments from Vodafone Idea if it declared bankruptcy. Besides losing a source of public-sector revenues from licensing and spectrum fees, the government would face rising unemployment in the telecom sector.

In a way, RJio is the only company that benefits from this judgment. It pays the minimum amount and might witness the exit of a rival.

— Gagandeep Kaur, contributing editor, special to Light Reading