Justice Arun Mishra’s Verdict to Benefit Reliance Jio, Hit Vodafone

On September 1, a Supreme Court bench led by Justice Arun Mishra and comprising Justices S Abdul Nazeer and M R Shah ruled on the so-called AGR (or Adjusted Gross Revenues) issue relating to back-payments for use of spectrum that the Department of Telecommunications (DoT) is claiming from private companies.

The verdict, one of Justice Mishra’s final rulings prior to his retirement on September 2, was on petitions filed by the DoT and by telecom companies to permit a staggered payment schedule for dues to the government arising out of an earlier judgment of the court on October 2019. That judgment had acknowledged an expanded definition of AGR to include non-telecom revenues.

While the telecom companies had sought a 15-year payment schedule for past dues after the DoT had proposed a 20-year schedule, the Supreme Court granted only a 10-year payment schedule to the telecom companies (telcos). After the government moved from a licence fee regime to a revenue-sharing arrangement a decade and a half ago, the telcos had agreed to pay a certain percentage of their AGR to DoT as licensing fees and spectrum usage charges.

In its October 2019 judgment, the Supreme Court had agreed with DoT’s arguments and declared that AGR was to be calculated by including all revenues earned by a spectrum holder, including those not involving the direct use of spectrum. This had resulted in demands for massive sums of money from the telcos by DoT – Rs 58,254 crore from Vodafone/Idea, Rs 43,980 crore from Airtel, and Rs 16,798 crore from Tata Teleservices (which has been acquired by Airtel).

However, the apex court declined to rule on the question of whether spectrum held by companies that are under insolvency proceedings before the National Company Law Tribunal (NCLT) can be sold under those proceedings, and which parties would be liable for AGR dues payable by those companies. This crucial issue remains unresolved.

The Supreme Court stated that the Tribunal was the appropriate forum to decide on this contentious question. And crucially, it ruled that no company that is using spectrum held by these insolvent companies under spectrum sharing and trading agreements would be liable for the latter’s AGR dues. As a result, Reliance Jio (part of Reliance Industries Limited, the country’s largest private corporate entity headed by Mukesh Ambani, the richest man in India and Asia and one of the richest men in the world) which has been using spectrum held by Reliance Infocomm Limited (once led by Mukesh Ambani’s young brother Anil Ambani, who is now financially strapped) and Airtel which has been using spectrum held by Videocon and Aircel under such agreements, will not be liable for the AGR dues of the bankrupt companies whose spectrum they are using. This interpretation of the law is certainly controversial.

Following the verdict, Vodafone/Idea is facing the largest financial burden, amounting to over Rs 54,000 crore. In the immediate aftermath of this judgment, the company’s stock price plummeted as talk proliferated of India’s telecom sector becoming a “duopoly.” Recent media reports have speculated that foreign investors, including US corporate giants, Amazon and Verizon, may be in discussions to acquire Vodafone/Idea.

Airtel, which is facing back-payments of around Rs 26,000 crore, is expected to be able to meet the liability, painfully. However, the company will experience difficulties in allocating funds for new capital expenditure, diminishing its ability to participate in an impending 5G (fifth-generation) spectrum auction by DoT that is expected to take place in 2021. Reliance Jio, meanwhile, faces no dues, and having recently claimed that it has developed its own 5G technology, is well placed to surge ahead as the dominant player in the market.

A Controversial Background

In its October 2019 decision, the Supreme Court had sided with DoT in a dispute that had been going on since 2005 by ruling that the AGR of telecom companies should be calculated by including revenue earned from all sources.

This verdict came as a severe blow to two of the three large telecom players, Airtel and Vodafone/Idea. The result of the verdict was that these companies owed the government over Rs 1 lakh crore in back payments. Following the judgement, the DoT raised these claims on the companies, and subsequently filed a petition in the Supreme Court seeking permission to allow the companies to pay their dues in a staggered manner over 20 years. This was because the revenue demands threatened to bankrupt the two telecom players, and had resulted in Vodafone – headquartered in London –announcingthat it would be forced to exit the Indian telecom market if forced to pay immediately.

Union Communications Minister Ravi Shankar Prasad did not take the remarks made the head of Vodafone kindly. And Justice Mishra gave a tongue-lashing to the government’s lawyers when it pleaded leniency from the court on the payment schedule. The hearings in the apex court took an interesting turn when the bench raised the question as to who would be liable for dues owed by telecom companies that had gone bankrupt but were sharing or trading their spectrum with other players, and whether the spectrum could be part of the insolvency proceedings for sale in resolution schemes. This question brought the largest telecom company, Reliance Jio (RJio), into the picture.

This was because RJio has made use of spectrum allocated to Reliance Communications (RCom), through a spectrum sharing agreement between the two companies. RCom had declared that it was bankrupt in 2018 and is currently the subject of insolvency proceedings before NCLT. RJio has reportedly placed a bid worth Rs 25,000 crore to acquire RCom before the insolvency professional appointed by NCLT to find a buyer for RCom.

The Supreme Court’s verdict meant that RCom too owed back-payments on its AGR to DoT based on the expanded definition of AGR. The present verdict has ensured that this burden will not pass on to RJio, despite its spectrum-sharing arrangement with RCom, and it is left to the NCLT to decide whether the liabilities on account of the re-assessed AGR dues will pass on to RJio if it ends up formally acquiring RCom.

Apex Court’s Verdict

The Supreme Court had to rule on the following issues:

1. Whether the telecom companies may be permitted to pay their remaining dues through annual instalments spanning a period of 20 years.

On this count, the court said: “We consider that the period of 20 years fixed for payment is excessive. We feel that it is a revenue sharing regime, and it is grant of sovereign right to the TSPs (telecom service providers) under the Telecom Policy. We feel that some reasonable time is to be granted, considering the financial stress and the banking sector’s involvement. We deem it appropriate to grant facility of time to make payment of dues in equal yearly instalments.The telecom service providers have to make payment in yearly instalments commencing from 1.4.2021 up to 31.3.2031 payable by 31st March of every succeeding financial year."

2. Whether spectrum can be the subject of proceedings before NCLT under the Insolvency and Bankruptcy Code (IBC)?

On this issue, the apex court said: “…this Court can examine the limited question in these proceedings whether the proceedings are resorted to as a subterfuge to avoid payment of AGR dues, and it is for the NCLT to decide whether the licence/spectrum can be transferred and be a part of the resolution process initiated under the provisions of the Code. Whether spectrum/licence can be subjected to (the) resolution process as an asset belonging to the telecom service providers, and whether the AGR dues are operational dues and have to be dealt with under the provisions of the IBC by NCLT.”

Significantly, under the IBC, secured creditors are the first priority for resolution and recovery efforts, followed by unsecured creditors, and under the code, AGR dues payable by the companies may be classified as “operational credit,” which is even lower on the list of priorities. The issue is whether dues to the government would fall into the category of operational credit.

The question is whether DoT is facing a situation wherein it will have to struggle to recover the unpaid back dues through the insolvency proceedings, as NCLT is primarily geared to protect the interests of banks and other financial institutions (lenders) to the exclusion of others (including the government).

3. How is the payment of AGR dues to be made in the cases of trading and sharing of spectrum by different telcos?

On this point, the court said: “With respect to the trading and sharing arrangement to the extent of spectrum traded or shared by different service providers under the sharing arrangement, the liability as per the guidelines, has to be borne by the respective telecom service providers.”

Who’s the Real Licencee of RJio?

One issue that the Supreme Court did not go into is whether the AGR dues owed on account of RCom’s spectrum that was acquired by RJio should be calculated based on the total revenues earned by RJio’s parent company – Reliance Industries Limited (RIL) – or on RJio’s own revenues. Determining the answer to this question would mean answering the question as to who is the true license-holder for the spectrum – RIL or RJio?

To understand this, it is necessary to go into the background of how RJio came into being. In an earlierarticlefor theEconomic and Political Weekly,published in June 2016,these authors had detailed the story behind the formation of RJio. Its origins lie in a tiny company named Infotel Broadband Services Private Limited that was thrust into the limelight in 2010. In an auction for third generation (3G) Broadband Wireless Access spectrum, the company that was worth only Rs 2.49 crore, won spectrum worth Rs 12,847.77 crore.

Infotel’s spectrum acquisition was supported with a bank guarantee worth Rs 252.5 crore (allegedly obtained in a questionable manner) in favour of RIL, and RIL also provided a loan to the company to meet the large cost of spectrum that it won in the auction. In the days following the auction, RIL acquired a majority stake in Infotel, and in 2013, renamed the company as Reliance Jio.

A former chief executive officer of a telco, speaking to one of the authors of this article on condition of anonymity, said there was need for lifting the “corporate veil” on Infotel to disclose the “real licensee.” He alleged that if the real licensee is RIL, the transaction between it and Infotel was “benami.” He wondered why RIL’s entire revenue should not be considered in the calculation of AGR.

“On August 23, DoT informed the Supreme Court that calculation of dues is not final, and that AGR is based on the ‘entire revenue generated by a telco, and is not dependent only upon revenue generated from spectrum.’ Despite its own stated position, why has the DoT not so far dealt with the AGR of RIL, based upon its entire revenue from 2010 to date, with penalty and interest?” he asked.

“DoT has incorrectly restricted itself to dealing only with the AGR of Jio, which is Infotel under a new name, and is using the spectrum residing with the real licensee RIL,” he said, adding that if all the non-telecom revenues of RIL are included in the calculation of AGR, it would then include revenues earned from its various other businesses, including oil refining, petrochemicals and polyester fibres. RIL’s dues 2010 onwards, including interest and penalties, would then add up to a stupendous Rs 7 lakh crore!

While the Supreme Court’s verdict has stated that no challenge to DoT’s assessment of AGR dues by telcos would be permissible, the verdict also notes that DoT’s current assessments are only “preliminary.” Pointing to this, the former CEO added: “As on date what the DoT has submitted to the Supreme Court is only a ‘preliminary’ computation of AGR. So this remains a live issue.”

He pointed out that “Justice Mishra’s bench judgment has not spelt out the AGR liability of an entity other than the ‘real licensee,’ but which is using the spectrum residing with its holding company and is generating revenue from the spectrum. Common sense says that AGR is attracted here too. But it is for the government and DoT to engage and spell out with precision the AGR applicability for non-licensed, step-up/step-down entities which use licensed spectrum.”

A Duopoly in the Offing?

Industry experts expressed their apprehensions toNewsClickabout the implications of the apex court’s judgement on the telecom sector.

Mahesh Uppal, an independent expert on India’s telecom industry, suggested that “the current crisis could have been anticipated and that both the government (the DoT) and the industry are responsible for allowing the present situation to come to such a pass. The bureaucrats did not want to take a call on any decision that may have resulted in a reduction in government revenues”

“The industry too cannot go scot-free,” he continued. “When it went along with the transition from the licence fee regime to a revenue sharing arrangement, it accepted an overly broad definition of AGR to include both telecom and non-telecom revenues. Thereafter, for around 15 years, there were many legal disputes. The regulatory authorities (the Telecom Regulatory Authority of India or TRAI and the Telecom Disputes Settlement Appellate Tribunal or TDSAT) implicitly accepted that the telcos had a case for changing the definition of AGR.”

Uppal said “the Supreme Court bench headed by Justice Arun Mishra chose to literally interpret the licence agreement,” adding: “To be fair to it, the court could not have decided if the agreement was fair, reasonable or appropriate. However, what was outrageous was that the bench insisted on recovering past dues with penalties, interest and late fees. This is responsible for the huge mess the industry is in atpresent.”

He said: “I do believe the Supreme Court judgment provides insufficient relief to Idea-Vodafone. We are now faced with a distinct possibility of the industry becoming a duopoly given the poor financialhealth of Idea/Vodafone and the public sector combine of Bharat Sanchar Nigam Limited and Mahanagar Telecom Nigam Limited. Whereas this sector still has huge potential, investor interest in Idea/Vodafone would be dampened given its huge liabilities.”

His fears were echoed by Brijendra K Syngal, former head of Videsh Sanchar Nigam Limited and another telecom industry expert. In posts on his Twitter account, Syngal called the verdict a “disaster” that is “designed to lead to a private sector player (Reliance Jio) calling the shots” and a “knockout punch for Vodafone “forc[ing] [its] eviction [and] departure.”

An Uncertain Aftermath

Within minutes of the announcement of the Supreme Court verdict, the capital markets reacted in a manner thatconfirmedthis impression – Vodafone’s share price crashed so fast that the stock market’s “circuit breaker” was triggered, stopping all sales of the stock. The scrip closed the day with a 13% drop in price. Meanwhile, Airtel’s stock saw a moderate rise of 6%.

ICRA (formerly Investment Information and Credit Ratings Agency)anticipatedthat after the Supreme Court judgment, the two affected players, Idea/Vodafone and Airtel, would hike mobile data and call tariffs to increase their Average Revenues Per User or ARPU. Just two days before the Supreme Court verdict, Airtel head Sunil Bharti Mittal was quoted in the media asking subscribers to prepare to “pay a lot more” and after the verdict, analysts expect tariff hikes to range between a low of10%to as high as 40%.

Two days after the verdict, it wasreportedthat both Airtel and Vodafone/Idea’s legal teams were preparing curative petitions seeking to appeal the Supreme Court’s verdict.Reportshave also claimed that American companies Amazon and Verizon may be preparing to invest up to $4 billion in a lifeline to Vodafone/Idea amidfearsthat it may turn into a “zombie” telecom company.

While it remains to be seen where the disputes go from here, there is little doubt that the real winner of the judgement of the bench headed by Justice Arun Mishra has been Reliance. Recently, Mukesh Ambani announced that RJio had developed an “entirely indigenous” 5G network capability with no components imported from China. In June, RJioappliedfor DoT’s permission to commence testing of its technology.

While Airtel had in Aprilsignedan agreement with Finnish company Nokia to lay the foundation for its own 5G network, its liabilities, after the AGR verdict, are certain to impact its abilities to raise funds for investments. Industry analysts suggest that Airtel’s ability to effectively participate in a 5G spectrum auction by DoT, likely to take place in 2021, will be impaired, leaving the field wide open for RJio to increase its domination over this crucial infrastructure sector.

The authors are independent journalists.