There must be fair competition in the telecommunications sector
We have just witnessed another episode in the evolution of the saga of the telecommunications sector in India. The board of directors of Vodafone Idea (Vi) has approved the conversion of part of its debt to the government into equity. Thus, around Rs 16,000 crore of interest on deferred spectrum and adjusted gross income (AGR) liabilities will now be converted into government equity, making it the largest stakeholder, holding 35.8% of the ‘entity. If the conversion of debt to equity goes through the complicated processes of the Department of Telecommunications (DoT), it will dilute the stake of promoters Vodafone Group and Aditya Birla Group to 28.5% and 17.8% respectively. There is a good chance that this is the case, because it is part of the back-up plan proposed by the government itself in October 2021 to avoid the exit of the besieged operator and thus protect competition in a rapidly darkening market. towards an effective duopoly between Jio and a stressed Airtel.
To be graceful, we can see the Indian telecom glass half full or half empty. There have been some landmark accomplishments interspersed with colossal mistakes. While optimists like us would like to focus on the half-full glass, it would be prudent to devote a little space of mind to mistakes to learn from this experience. Because, perhaps the best political advice we can give is what not to do, rather than the other way around.
Telecoms in India, much more than elsewhere, are not a faint-hearted affair. The stakes are high, amounting to billions of dollars, and eternal litigation has been a drain on resources, used as much if not more for strategic maneuvers than for justice. Every stakeholder, including the government, has sought intervention from the courts at one time or another, and not always to correct a perceived error. Vodafone entered the Indian market by purchasing Hutch under an offshore deal in 2007 which complied with applicable law. Fairness would require changing the law – if it were abusive – prospectively and not retrospectively. The retroactive amendment was a blow, with Vodafone receiving a permanent tally.
The government has also often used the telecommunications sector to obtain much-needed liquidity. It is relevant to ask whether the sequence of adverse events irreversibly crippled the goose that laid the golden eggs. In the Bollywood blockbuster Deewar, Amitabh Bachchan saves his own life by highlighting the fallacy of tearing the bird’s entrails to extract all the eggs in one fell swoop, he being the metaphorical goose. Bachchan’s advice was largely ignored outside of the film. To cite a few examples, the constituents of AGR include non-telecom license revenues and part of the Rs 16,000 crore quoted above is the disputed amount and accrued interest and penalties on unpaid license fees. The idea of an AGR-based royalty is an artefact from an era when there was no spectrum auction. After introducing very lucrative spectrum auctions, the government could have avoided other forms of royalties from operators who bid for spectrum, including spectrum usage fees (SUC). A minimal administrative fee could have been charged to administer the licenses. In addition, by allowing “back door entry” into the mobile sector in 2003, the allocation of harmful spectrum by the “first come, first served” (FCFS) method of 2008 and looking away when A Jio with deep pockets aggressively entered the market in 2016 are examples of unfairness that have had a debilitating impact on competition in the industry.
Vodafone Idea, Airtel and Jio are all professionally run companies with arguably equal access to technology, network services, financial and marketing skills. One would expect the competition to thrive in such a scenario which might well have become the envy of the world. But access to government is apparently uneven (at least in terms of results) and this is the enduring lesson of two or more decades of previous experience. The system must correct this failure and must not only be fair, but also be seen to be fair to all entities. Sometimes in India inertia results in decisions that favor one over the other, not because there are bad intentions, but because the system is such that the status quo is the rule. dominant response. It should also be carefully avoided to the extent possible by convening a high level intervention.
Back to the present and to the fortuitous occasion of the moment. Over the past few years, the government has struggled to bail out a heavily indebted industry, the immediate reasons why, (a few also stated above), are an intense and debilitating price war, an unreasonable definition of AGR, an extractive spectrum auction regime and, of course, advancing technology negatively impacting the revenue streams of operators straddling traditional networks. The implementation of this back-up plan means that the Indian government will hold stakes in two of the country’s four main telecommunications operators, namely BSNL (100%) and Vi (35.8%). With the exception of China, no other country in the world has 100% government-owned entities in the telecommunications sector. And in recent times, even the Chinese government has encouraged private sector participation to stimulate competition in a market that has so far experienced monopolistic and unfair competition. In France and Germany, the government has reduced its holdings in former public sector entities to a minimum. Telecommunications are almost everywhere the domain of private enterprise.
Another aspect that needs to be considered is that the current license conditions prohibit any company / legal person, directly or through its associates, from holding a substantial interest (defined as a 10 percent interest or more) in more than one licensed company in the same area for the same service. In order to comply, the government may need to dilute its share or explore the option of merging BSNL and Vi. The latter is attractive for a number of reasons. BSNL could use Vi’s 4G equipment to use its government-allocated 4G spectrum. Vi has a good radio network but lacks the backhaul, to make up for it which allows it to use BSNL’s pan-Indian fiber optic network. A merger between BSNL and Vi could help kill two birds with one stone. On the one hand, this can help revive Vi and on the other hand resuscitate a struggling BSNL through a synergy of professional management and public sector assets. Vodafone and Idea Cellular agreed to merge in 2017 and create “Vi” to protect against an aggressive entrant like Jio. Therefore, a merger between these two entities can again help protect the interests of BSNL and Vi, and also ensure that the Indian telecoms sector continues to have at least three significant players in the market, which is a threshold. minimum to ensure fair competition. within the sector. A win-win for telecoms, if there is one.
This column first appeared in the print edition on January 13, 2022 under the title “Taking the fair call”. Kathuria is Dean of the School of Humanities and Social Sciences at Shiv Nadar University and Suri is Senior Researcher at the Center for Internet & Society (CIS)