Understanding the Telecom war in India and current Scenario: The Telecom industry in India has gone from being one of the most attractive to a cruel environment to all its players. The industry currently consists of three players i.e. Jio, Airtel, and Vodafone Idea. But if we look over the last two decades there have been over 16 players who have tried their hand in the industry.

We already know about the innate challenges the industry poses due to the ever-evolving technological environment. A newly arrived technological advancement may be completely obsolete in the next five years. But these are the challenges that a telco foresees and enters the industry with. Today, we’ll discuss the telecom war in India. Here, we’ll try to find out the key factors that have brought the industry to currently operate with barely three players and also look into the current telecom scenario.

Telecom Industry – The Story So Far

In the pre-liberalization period, there existed only state-owned companies like BSNL. The operations of these companies can be dated back to the British era. Post the liberalization the government began issuing licenses to private players in exchange for a license fee.

This license fee set, however, was in accordance with The Telegraph Act of 1885 set to govern the state players. The private telcos found it hard to adhere to this and constantly defaulted on the fee payments.

Noticing this the government introduced the National Telecom Policy in 1999 where the telcos were given the option to either pay the existing license fee or share a percentage of their revenue which was called AGR ( Adjusted Gross Revenue). 

— The More the Better

During this period the government believed that the greater the number of players the greater the benefits the consumers would receive. This has bought up to 16 players in the telecom industry. This, however, ended up doing much more harm to the industry due to the competitive pricing practices followed by the telcos to emerge as the top players.

Telcos kept entering the industry and vanishing from the industry at the same time. The majority of the players were acquired or forced to merge with the top players. The remaining players went bankrupt or had their licenses revoked.

(Source: Wikipedia)

— AGR Dispute

During this period the Department of Telecommunications (DoT) entered into legal disputed with the players. If must be noted that Revenue meant that any income received by the company irrespective of it making profits or losses. The companies agreed to pay AGR assuming that the revenues to be paid would be from the core(telecom related) activities of the industry. The DoT argued that a percentage of the revenue from all sources ( core and non-core) is to be paid.

This involved installation charges, value-added services, interest income, dividend, and even profit on the sale of assets, insurance claims, and forex gains. This meant that the telcos now owed 1.47 Lakh crore in AGR to the DoT. Other government entities like TRAI (Telecom Regulatory Authority of India) and TDSAT (Telecom Disputes Settlement and Appellate Tribunal) also voiced their concern over this claim.

Both TRAI and TDSAT supported the telcos in this against the DoT. The TRAI even recommended excluding non-telecom revenues from the AGR but DoT challenged the TRAI recommendations. This led to a 14 year legal battle between the telcos and the DoT. The decision ultimately came in favor of the DoT on 24th October 2019. The courts ordered the telcos to pay  1.47 Lakh crore in AGR to the DoT. 

Interestingly government entities like GAIL and PGCIL also had acquired a license from the DoT. The DoT also a government entity now claims that it is owed 1.72 Lakh Crore from GAIL. This is after computing its share from any revenue that GAIL made. The amount sought by the DoT is more than 3 times the net worth of GAIL.

— Enter Jio: A Mukesh Ambani Offering

These troubles in the telecom industry seem monumental and we have not even considered other factors like the 2G scam that took place. The worst, however, was yet to come for the telcos. In 2016, a new player Jio entered the industry. The predatory pricing strategy followed by Jio offered consumers 4G data for free. This further put tremendous stress on the telecom industry.

When Reliance Jio entered the markets in 2016 there were up to 7 telcos who had a substantial footing in the industry. By the end of 2019, there were only 3 other companies competing. Out of the three only Jio was profitable by extremely slim margins and airtel running but on losses. Vodafone and Idea too in losses were barely surviving the pricing onslaught. 

— Spectrum Dues

Apart from the AGR the telcos also owe the government dues from spectrum allocation auctions. The telecom industry makes the use of electromagnetic waves that are made available through a spectrum. Hence a spectrum is considered a national resource and allocated carefully by the government. The spectrum allocation charges are paid in installments to the government. With the telcos already in debt, they further started defaulting on these too.

Finance Minister Nirmala Sitharaman announced a moratorium on these installments for 2 years. But the moratorium provided by the government does not come interest-free as they will still have to pay additional interest accrued during the 2 year period. Airtel currently owes Rs. 11,476 crores on its installments with Vodafone Idea owing Rs. 23920 crores.

Telecom War in India: Current Scenario

All sympathies do not lie with the telcos. Prior to the Jio’s entrance, the telcos enjoyed a  period where they charged consumers exorbitantly. This was the main reason why Jio already had their stage set in 2016. Their offer of charge-free services to customers enabled them to immediately gobble up a section of the market share.

This was followed by the telecom war in India and competitive pricing which forced existing players like Airtel, Vodafone, and Idea to lower their prices and profit margins. 

How telcos are adapting to increased debt & 5G Preparation?

The telecom industry has forced its payers to adapt to raising funds from foreign investors in exchange for a stake in the company.

— Reliance Jio

After Reliance entered the telecom sector its debt shot up by 438%. Mukesh Ambani has set out to make Reliance a zero net debt company. This would mean wiping out 1.54 lakh crore of its debt. The following table shows the stakes sold and amount raised

Stake sold to	% of Stake Sold	Amount raised (Rs Cr)
Facebook	9.99	43,574
Sterling Silverlake	1.15	5,655.75
KKR	2.32	11,637
General Analytics	1.34	6,598
Vista Equity	2.32	11,637
Mubadala	1.85	9,094
Total	18.97	88,195.75

Read More: Facebook- Jio Deal: What $5.7B investment means to Stakeholders?

— Airtel 

Airtel remains the only major player other than Jio which able to survive, compete, and raise capital with ease at this stage. It recently announced a 2.75% stake sale to raise 7500 crores ($1billion). In January, Airtel raised $15000 crores through qualified institutional placement and foreign currency convertible bonds for 7,500 crores ($1billion)

— Vodafone Idea

Vodafone and Idea have merged to form Vodafone Idea. This has enabled VodafoneIdea to become the top company in terms of subscribers. But this has only ensured their survival in the Indian markets. 

Vodafone Group CEO Nick Read has vowed to not invest in the Indian markets. This can be justified due to the court ruling against the telcos with regard to AGR.  This has made investing in India a lost cause for Vodafone as all incomes earned by the companies ill be used to pay back the existing AGR dues apart from the new AGR dues that will keep on accruing.

Also, their survival will require debt to finance 5G costs. This investment which does not generate any income in the foreseeable future will be hard to be explained to Vodafone shareholders in the UK. Vodafone Idea not only faces difficulty in raising investment but also struggles with its low 4G utilization. (Also read: Vodafone Idea has managed to attract attention from Google which eyes a 5% stake in the telco.)

In an advent, if one of the 3 players does not survive it would lead to the Indian markets turning into a duopoly. The two telcos that do survive may form cartels which will eventually result in a pricing agreement. This in addition to the AGR dues to the DoT and 5G spectrum will result in the consumers holding the burden through increased prices.

Rank	Operator	Subscribers (millions)	Market Share	Ownership
1	Jio	382.89	32.99%	Jio Platforms
2	Airtel	329.02	28.35%	Bharti Airtel Limited
3	Vodafone Idea	325.54	28.05%	Vodafone Group (45.1%), Aditya Birla Group (26%), Axiata Group Berhad (8.17%), Private Equity (20.73%)
4	BSNL	123.13	10.61%	Government of India

(Table: Mobile Operators in India as of 29 February 2020 according to TRAI)

What the Government can do? 

To reduce the burden on the telecom industry the existing players have requested the Telecom Secretary to provide the 5G spectrum free of cost to existing players in an attempt to rescue the industry. The government can also ensure that cartels are not formed and players survive by benefitting the consumers.

This can be done by providing the 5G spectrums in exchange for the telcos agreeing to adhere to both floor pricing and price ceiling. By doing this the telecom industry will be provided some relief through 5G spectrum allocation as requested by telcos. The floor prices and price ceiling will ensure healthy competition and limit any adverse impacts on consumers.

Closing Thoughts

The story of the Indian Telecom Industry so far shows that the government is just inches away from slaughtering the golden duck in an attempt to increase its revenue. It is high time the Center interferes so that both the industry does not lean towards a duopoly or monopoly and at the same time the consumers do not face the brunt. Any efforts from the government to recover unreasonable amounts from AGR will push the telcos to increase debt borrowing from the banks.

This increased debt in addition to the cost of surviving by further investing in the 5G spectrum will force the burden towards the consumers. In an event of intense telecom war in India where a major player throws in the towel to quit, the already ailing banking sector will be further hit. Other stakeholders like the employees who earlier dependent on the telcos will further be added to the casualty lists.