Updated: Oct 15, 2020
Author: Devansh Parekh & Neil Kothari
Since 2016, the telecommunications industry (“the industry/market”) has been attracting public attention due to the competition, change in regulations and innovations. From Reliance Jio Infocomm Limited’s (“Jio”) arrival prompting the drop in market share of other players to the Vodafone-Idea merger and lastly, the Adjusted Gross Revenue (“AGR”) dues inducing financial burden on the industry.
CHANGE IN THE INDUSTRY’S DYNAMICS
In September 2016, a new network emerged by the name of Jio in the telecommunications industry. Being the brainchild of Reliance Industries Limited (“RIL”), Jio set foot into the industry with a pricing strategy that led to the downfall of every other telecom service in the industry. One of the leading players in the showcase before Jio entered was Bharti Airtel Limited (“Airtel”) that had a market share of close to 31%. Other major telecom players were Vodafone (23%) and Idea (19%). However, after Jio’s arrival, the businesses and market share of Airtel (23.5%), Vodafone (18.1%) and Idea (16.9%) shrunk drastically.
Following the significant decline, Airtel filed a complaint before the Competition Commission of India (“CCI”) against RIL and Jio, alleging a contravention of the provisions of Sections 3 (Anti- Competitive Agreements) and 4 (Abuse of Dominant Position) of the Competition Act, 2002 (“Act”).
Airtel alleged that upon rollout of its 4G (4th Generation) services, Jio announced ‘Jio Welcome Offer’ under which it provided free services that included unlimited calls and data from 5th September 2016 to 31st December 2016 which was curtailed by the Telecom Regulatory Authority of India (“TRAI”) to 3rd December 2016. However, Jio extended the validity of the offer till 31st March 2017. Airtel argued that this pricing strategy of Jio was predatory to eliminate competition that was in contravention of the Act as well as TRAI directions. Airtel alleged that this strategy was done to monopolize the market.
It is a well-known fact that RIL is one of the largest conglomerates in India and has recently ventured into the telecom sector. Airtel further contended that RIL had used its dominant position in other markets to enter the telecom industry and thus was able to offer free services irrespective of the volume of usage. Thus, Airtel asserted that Jio was in a dominant position due to RIL’s huge financial support that allowed it to gain a market share of almost 7% by early 2017. The CCI while dismissing Airtel’s arguments held that:
1. Financial strength is relevant but not the sole factor to determine the dominant position of an enterprise. Hence, Jio was not in a dominant position but a new entrant.
2. Jio is not likely to hold a dominant position in such market on account of the presence of Airtel, Vodafone, Idea, etc., who derive commercial and technical advantages due to their sustained and sound business presence in the telecommunications industry.
3. Offering free services cannot by itself raise competition concerns unless an equivalent is obtainable by a dominant enterprise and demonstrated to be tainted with an anti-competitive objective of barring competition/ competitors.
4. In a competitive market scenario, where there are already big players operating within the market, it might not be anti-competitive for an entrant to incentivize customers towards its services by giving attractive offers and schemes. Such short-term business strategy of an entrant to penetrate the market and establish its character cannot be considered to be anti-competitive.
Similarly, in 2016 there was a case against Vodafone India Limited where there was an alleged abuse of dominant position with respect to unfair international roaming rates and data usage charges. Since no case of contravention was made out against Vodafone, the CCI held that Airtel, Idea, Reliance, Tata, Aircel and MTNL were likewise providing wireless telecommunication services in Mumbai. Since all these players were tantamount to each in terms of size, resources, the CCI held that Vodafone was not dominant in the relevant market. Thus, the competitive threat in this industry has not been anonymous.
The ingress of Jio was not only ominous for Airtel but also led to unsalvageable losses for other players in the market. It not only led to the drop in the market share of its competitors but also led to the merger of Vodafone and Idea in 2018. This merger was at the nick of time to save each other’s skin due to the intense competition. The CCI observed that both Idea and Vodafone had an insignificant presence with their combined market share being less than 5% in terms of number of standalone towers and/or several tenancies. The CCI evaluated the merger on various grounds such as concentration analysis, buyer power, etc. and approved it on the prerequisite, that post the merger there would still be 5 private players (Airtel, Jio, Tata, RCOM and the merged entity) and 1 state-owned player (BSNL/MTNL).The CCI concluded that despite the effect of increasing concentration in the industry, this merger would have no adverse effect on competition in the telecom industry in India. It was also observed that not only the number of subscribers and usage of data was increasing significantly but also the industry was facing declining revenues and high debt.
THE AGR ADDING TO THE WOES
The miseries have just piled on from here. The Telecom Service Providers (“TSP”) namely: Vodafone, Airtel, Idea, Jio, Reliance Communications, Aircel and other minor players were ordered to pay a sum of Rs. 92000 crores to the government.  The memoir of the AGR dispute is as follows:
In 1990, the government had formulated the National Telecom Policy, 1994 (“NTP, 1994”) to allow foreign direct investments and domestic investments in the telecom sector of India. The NTP, 1994 also stipulated a fixed Annual Licence Fee for the TSP to be paid to the government.
Due to the steep licencing fee, the government formulated National Telecom Policy, 1999 (“NTP, 1999”) to provide relief to the TSP. Under the new policy, the TSP would enter into a licence agreement with the government, thereby sharing a percentage of their AGR with the government as their Annual Licence Fee and Spectrum Usage Charges instead of paying an annual fee amount. Various TSP entered into a license agreement with Department of Telecommunication (“DoT”) after the due implementation.
In 2000, the DoT on the recommendation of TRAI amended the license agreement and directed TSP to pay their licence fee based on the AGR definition as stated by the government. In 2003, a petition was filed before the Telecom Disputes Settlement and Appellate Tribunal (“TDSAT”) questioning the validity of AGR’s definition in the licence agreement. DoT argued before the Tribunal that AGR includes all revenues (before discounts) accrued from both telecom and non-telecom services, whereas TSP argued that AGR incorporates only the revenue accrued from the telecom services and not from non-telecom services such as dividend, interest or profit on the sale of fixed assets, etc.
In 2006, TDSAT held that TSP was obliged to pay a portion of their revenue as licence fee, accrued to those activities that were specified in the telecom licence. Furthermore, it sought TRAI’s recommendations on the definition of licensed and non-licensed activities. TRAI subsequently gave its recommendations defining the items to be included in the AGR for licence fee payment. In 2007, TDSAT accepted most of the TRAI’s recommendations and passed an order in August 2007 applicable to that TSP with effect from the date when they filed their petition before the Tribunal. The Association of Unified Telecom Service Providers and Cellular Operators Association of India filed a review petition before the TDSAT, pleading the court to make the aforementioned order applicable to all members of the above two bodies from the date of filing their petition. The TDSAT order of August 2007 was challenged by DoT before the Supreme Court.
In October 2011, the Supreme Court set aside the order of TDSAT and instructed the licensees to challenge their demands before TDSAT. The Supreme Court also observed that the demands of the licensees would have to be decided on the merits of the claims and determine such claims to align with the licence agreement and the AGR definition. Subsequently, the telecom licensees challenged the DoT license fee demand before the TDSAT. In April 2015, TDSAT ruled in favor of TSP and held that the AGR included all revenue receipts except capital receipts and revenue accrued from non-telecom services. It also requested the DoT to rework the licence fee.
DoT challenged the TDSAT order of 2015 before the Supreme Court. They contended that definition of AGR as stated under the licence agreement should be upheld and requested the court to set aside the given order in contention. In October 2019, the Supreme Court held that the definition of gross revenue was clear in the agreement and raising objections regarding it is tenuous. Hence, there was no justification to raise them and keep them pending for the past two decades. It ruled in favor of the DoT and directed the licensees to pay the due amount to DoT within three months.
The judgment of the Supreme Court directing the TSP to pay the hefty AGR dues caused a tremendous financial burden on the TSP. It resulted in some of the TSP contemplating loss of funds, loss of finances, and loss of jobs. After much deliberation, the Government filed a plea before the court to seek approval on their plan to provide 20 years to TSP to pay off their AGR dues. In June 2020, the Supreme Court agreed to consider their plan after much reluctance and sought information on the bank guarantees of the TSP and a roadmap to repay the dues in 20 years. On 20th July 2020, the Supreme Court heard the plea of the TSP to allow staggered repayment of their AGR dues. The Court also observed that there would no scope of reassessment or recalculation of AGR and the calculation provided by DoT shall be treated as final. The Court also agreed to look into the bonafide of the decision to invoke insolvency on the part of several companies that are in liquidation with AGR dues of over Rs. 38,000 crores. On 10th August 2020, the Court observed that recovery of dues may not be possible from TSP undergoing insolvency and the Government must form a plan to recover dues. The Court inquired whether the spectrum can be sold under the Insolvency and Bankruptcy Code (“IBC”) to recover dues. The DoT contended that it cannot be sold under IBC as it is a national property and TSP contended that it can be sold and bought as it is transferable in nature. Aircel Group, Videocon Communications Ltd and Reliance Communications Ltd have filed for Insolvency and informed the court of their decision to admit DoT as an operational creditor in the resolution plan. The Court has asked the DoT to submit all the orders of National Company Law Tribunal (“NCLT”) and National Company Appellate Law Tribunal allowing the sale of spectrum. On 1st September, the Court allowed a staggered payment to TSP for 10 years effective from 1st April 2021 and ordered the TSP to make an upfront payment of 10 per cent of the dues. Furthermore, the Court directed the NCLT to decide on the issue of sale of the spectrum by TSP facing insolvency proceedings.
Regardless of the competition and regulations, the telecom services have been trying to align their vision with the evolving business environment. The ever-competing market has dawned upon us the era of 5G (5th generation) services where Airtel and Nokia have joined hands to launch the 5G services by 2022. Vodafone Idea has decided to raise funds through equity and debt to compete against other TSP and to reduce the weight of the AGR dues. Furthermore, tariff hikes in the industry seem inevitable due to the current market condition caused by the pandemic. Thus, the competition in this industry continues as some players seek survival while others compete to be the leaders.
 Re Bharat Airtel Ltd and Reliance Industries Ltd, Reliance Jio Infocomm Ltd, Case No 03 of 2017 [CCI].  Dominant position is defined under the explanation of Section 4(2)(a) of the Act - Dominant position means a position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to- i. operate independently of competitive forces prevailing in the relevant market; or ii. affect its competitors or consumers or the relevant market in its favour.  The Competition Act, 2002, No. 12 of 2003, Acts of Parliament (India).  Predatory pricing is defined under the explanation of Section 4(2)(b) of the Act - predatory price means the sale of goods or provision of services, at a price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors.  Re Bharat Airtel Ltd and Reliance Industries Ltd, Reliance Jio Infocomm Ltd, Case No 03 of 2017 [CCI].  Id.  Id.  Re Vishwambhar M Doiphode and Vodafone India Ltd, Case No 04 of 2016 [CCI] decided on May 5, 2016.  NCLT Order under Section 31(1) of the Competition Act, 2002 dated 3rd Oct, 2017, (2017) SCC OnLine CCI 69.  Id.  Union of India vs Association of Unified Telecom Service Providers of India, (2019) SCC OnLine SC 1393. Association of Unified Telecom Services Providers of India and Others v. Union of India, (2006) SCC OnLine TDSAT 135.  Association of Unified Telecom Services Providers of India and Others v. Union of India, (2007) SCC OnLine TDSAT 578.  Union of India Vs. Association of Unified Telecom Services Providers of India and Others, (2011) 10 SCC 543.  Association of Unified Telecom Services Providers of India and Others v. Union of India, (2015) SCC OnLine TDSAT 1325.  Union of India vs Association of Unified Telecom Service Providers of India, (2019) SCC OnLine SC 1393.  Samanwaya Rautray and Devina Sengupta, SC sceptical of govt’s 20 years AGR recovery plan from telcos, wants dues of PSU’s waived off, The Economic Times (June 12, 2020), https://economictimes.indiatimes.com/industry/telecom/telecom-news/sc-asks-for-telcos-agr-payment-plan-says-they-should-reconsider-imposing-on-psus/articleshow/76317286.cms?from=mdr.  Union of India vs Association of Unified Telecom Service Providers of India, (2020) SCC OnLine SC 703  Nokia bags Rs. 7500 crore deal from Airtel to deploy 5G Network, The Economic Times (April 29, 2020), https://economictimes.indiatimes.com/industry/telecom/telecom-news/nokia-bags-rs-7500-crore-deal-from-airtel-to-deploy-5g-network/articleshow/75432305.cms?from=mdr.  Voda Idea approves raising up to Rs 25,000 crore via equity, debt, The Economic Times (September 04, 2020), https://economictimes.indiatimes.com/markets/stocks/news/voda-idea-approves-raising-up-to-rs-25000-crore-via-equity-debt/articleshow/77933358.cms