Mistakes made by Airtel, Vodafone

Ever since the Supreme Court rejected, late last month, the telecom companies’ plea on licence fees and spectrum usage charges it was expected that not only would there be a heavy outgo for these companies but also there would be questions over their ability to continue to carry on business as before. Now there is complete clarity.

Both Bharti Airtel and Vodafone Idea have told the country’s stock exchanges that there exists a significant risk to their ability to carry on with their mobile telephony business.

Bharti Airtel, for instance, told the country’s stock exchanges that the verdict ‘represents a material uncertainty whereby, it may be unable to realise its assets and discharge its liabilities in the normal course of business, and accordingly may cast significant doubt on the Group’s ability to continue as a going concern company’.

Stripped of accounting jargon, the company is saying that if there is no financial relief forthcoming either from the government or from the community of investors or both, it may have to shut shop. The stock exchange filing of Vodafone Idea, makes a similar assessment.

But the companies have only themselves to blame. They had ample time to secure themselves financially, from any adverse fallout of the court verdict. After all, the dispute between the telecom companies and the government had been a long-standing one, going all the way back to nearly a decade and a half when the licence-fee regime was changed from one of fixed annual payment to one based on a percentage of annual revenues of the operators. But they chose not to do anything in the matter on the facile assumption that the court’s decision would go in their favour.

What is even more astonishing is that the quantum of money involved in the dispute was something that they could have easily handled on an ongoing basis, year after year. Even if they wanted to fight the case in the court it was always open for them to pay the disputed levies ‘under protest’ and recovered it back from the government, with even interest, once the court decides in their favour.

Take the case of Vodafone Idea. The actual difference in the amount that the company is now required to fork out by way of licence fees and spectrum usage charges over what it has already paid, comes to only ₹11,140 crore. But the interest, penalty for non-payment on due date and interest on such penalty resulted in the government’s claim ballooning to ₹44,150 crore. In other words, finance cost and penalties account for an extra 300 per cent of basic dues by way licence fees and spectrum usage charges.

It is true that ₹11,140 crore is by no means a small sum. But against that must be set the fact that the claim actually represents dues to the government spread over nearly 15 years of telephony operations.

Also, when seen in relation to the gross annual revenues of the company, the disputed amount annually is not such as to impose a heavy burden on the operations of the company.

For the record, Vodafone Idea Cellular clocked ₹37,000 crore in gross annual revenues in financial year 2018-19 alone. Even more ironic is that the company had made a provision of ₹18,470 crore towards possible claims from the government. So the money was there within the company but it chose to litigate its way out of its financial claim and came a cropper.

Bharti Airtel was even better placed to handle the annual incremental demand from the government given its even superior financial capacity. The company owed ₹6,164 crore in disputed levies. But the interest, penalty and interest on such penalty pushed up the total claim by a further sum of ₹22,286 crore to take the final dues to ₹28,450 crore.

It is worth noting that Bharti Airtel’s gross revenue in 2018-19 was even higher at roughly ₹50,000 crore and the accumulated basic levies by way of licence fees and spectrum usage charges that were in dispute, is just a fraction of that.

Judicial route preferred

This is not say that the companies should not have put up a legal fight to assert their rights and instead should have meekly paid up whatever the government had demanded of them. Rather, the point here is that companies’ interests would have been best served by paying the disputed sum ‘under protest’ and in the process saved themselves the crippling additional burden of punitive levies in the form of interest, penalty and interest on penalty.

It has become a deeply ingrained habit among managements that whenever there is a commercial dispute between a company and the government, litigation is the preferred approach. Since the justice delivery system in the country is extremely slow the temptation to use the legal mechanism to delay paying statutory dues is now part of the corporate DNA.

This almost invariably works in companies’ favour. But this was one situation where a more cautious approach to dealing with the government’s demand for higher licence fees would have been eminently more sensible. For two reasons. One, the dispute in this case was on the question of what constitutes ‘revenue’, a percentage of which was to paid to the government as licence fees and spectrum usage charges.

The telecom companies contended that it should conform to the generally accepted notions of ‘revenue’ in accounting theory and, additionally, it should be restricted to such revenues as are derived exclusively from offering a telephony services to their subscribers.

The government’s contention was that there exists a contract between it and the telecom operators which spelt out the receipts that should go into an assessment of ‘revenue’ for purposes of levies due to the government.

The so-called accounting notions of distinction between ‘capital’ and ‘revenue’ are irrelevant for this purpose. Should one go by the accounting notions of ‘revenue’ or a notion of ‘revenue’ that is spelt out in a duly executed contract between parties (however absurd such a notion of revenue as spelt out, be) is the crux of the dispute.

One could argue that there is nothing here to suggest that the telecom operators’ case is inherently so strong that the situation called for the adoption of the litigation route on the part of the telecom operators.

Surely would not the government’s contention of a contractual commitment dictating the definition of ‘revenue’ be just as strong? If the telecom operators’ was only a 50:50 proposition was there a case for legal approach to resolution, especially when the contract contained a toxic clause for punitive levies as in the instant case?

These companies wanted to opt out of a fixed licence fee regime in favour of a regime computed as a percentage of revenues earned. Now that choice has landed them in as serious a situation as the earlier one, if not worse. Oscar Wilde spoke of two tragedies in life. “Not getting what one wanted and then getting it”. He might as well had Indian telecom companies in mind when he said it.

The writer is a former Editor of BusinessLine