India may soon see an oligopoly in the telecom sector, if the staggering sum of outstanding Adjusted Gross Revenue (AGR) dues is not resolved in an appropriate manner. Telecom has seen consolidation, mergers, potential bankruptcy and cut-throat competition; as a result, the number of meaningful players has fallen from a dozen to three in less than a decade. Businesses fold up if they fail to measure and manage risks.

AGR dues are one such risk, where telecom companies failed to estimate the level of risk and felt that they will be able to navigate it. They cannot entirely be faulted here. Precedent shows that they have been able to manage such situations. But this time they were caught on the wrong foot. How did this happen?

Two factors are principally responsible. First is the attitude of our businesses; and, second, and more important, is our law and legal system. Businesses do not read law; they read between the lines and travel a path which is risky. However, it has its rewards as well. If successful, such clever interpretation gives windfall gains. Our legal system provides fertile ground for such interpretations. Lawmakers use language which can easily be interpreted in many ways, and business, with the help of legal luminaries, choose the interpretation which best suits them, notwithstanding risks. And the package gets completed with our judicial system, which takes ages to adjudicate.

The AGR case ticks all these boxes. The litigation has taken close to 15 years to reach a level of finality. It began with definition of AGR in 1999, resulting in the first litigation by industry in 2005. Therefore, if today the liabilities have ballooned so much that companies can go bust, both the corporates and the legal system are to blame. A solution has to be found immediately, while any structural change, although vital, can wait. The imbroglio has to be sorted out in the interest of consumers rather than telecom operators or the government. Else, a situation of oligopoly, which is certainly not conducive to consumer welfare, is likely to arise.

It is important to acknowledge that at least one big operator cannot pay in a lumpsum. However, any solution would have to be uniformly applied, rather than selectively. Therefore, rather than lumpsum payments, the only way forward is instalments.

Guarantee from promoters

The Supreme Court is worried about sanctity of the commitment to pay, and explored a guarantee from promoters. A personal guarantee from promoters runs against the basic concept of corporate structure. Further, this is not a case where promoters have enriched themselves at the cost of the exchequer and public. A back-of-the-envelope calculation shows that the promoters of the company owing the largest amount have in all contributed approximately ₹1.6 lakh crore as equity, with the public putting in about ₹30,000 crore. Promoters in the last 20 or more years have taken only ₹289 crore as dividend. This is certainly not a case of unjust enrichment.

Therefore, the guarantee requirement needs to be dropped, so that consumers are not to be exposed to risk of oligopoly and service disruption. Industry’s offer to provide licence as security, shows intent and seriousness. In addition, there could be a freeze on dividend and right to alienate shares.

This option is a better solution financially. If a lumpsum payment is insisted upon, then at least in the case of one operator, bankruptcy is certain. This will not realise a single penny for the exchequer, given huge bank loans. In the instalment route, there is at least a chance that dues may be realised.

The Supreme Court has rapped the Department of Telecom in issuing a demand to PSUs, acknowledging that DoT can make a mistake. It is, therefore, possible that DoT could have made a mistake in calculating the amount due from private operators.

The case should ideally be settled and not be litigated further. However, for the purposes of transparency and fairness it is desirable that a reconciliation be arrived at between the amount demanded by DoT and the assessment of operators. The amount to be paid does not come from the pocket of promoters alone; it comes from ordinary shareholders as well. Justice should be done to silent shareholders. Lumpsum demand, at least in the case of one operator, is akin to a death penalty. Bankruptcy will hurt banks which will have NPAs, thus impacting depositors, employees and self-employed persons, besides consumer choice.

Entry barriers are huge; historical data suggests that all small operators have disappeared and no new competitor is likely to enter. Yet, telecom is particularly vital today, as shown by the lockdown. In the last month one telecom operator has garnered close to ₹1 lakh crore as fresh equity, yet two others operating in same space have not attracted investments. Until the apex court closes this chapter, fresh equity investment will not be possible.

The writer is Managing Director,

Stakeholders Empowerment Services