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October 31, 2019

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When a telecom tiger grew fat on 1999 migration package, chose to be dodgy on AGR liability, conveniently forgot to provision


- Dr. Manoj Kumar, Founder & Managing Partner [ Hammurabi & Solomon Partners ]

Manoj

The Hon’ble Supreme Court vide its decision dated 24 October 2019 set to rest all contentions and counter-contentions surrounding outstanding dues of telecom service providers (TSPs) to the Government.

Some interesting observations of the Hon’ble Court need to be highlighted here to understand the unfolding of events prior to 24 October 2019 and thereafter.

“189. Further, the conduct of the licensees has also to be considered in the backdrop of the fact that the regime of revenue sharing was extremely beneficial than the previous regime of the fixed license fee, and they have tremendously benefitted by it as is apparent from the statistics of the revenue earned under the revenue sharing regime. When Government has parted with the privilege as to revenue on sharing basis under the license, and an agreement entered into, it ought to have been precisely followed…..”

Given the hue and cry raised by some of the TSPs on sustainability and inability to meet licence fee obligations, Government let its claim on the fixed license fee and moved into a migration package providing for revenue sharing on contractual terms to partner the growth of the sector, allow the TSPs to rise and shine, and thereafter pay as they earned.

As a result the gross revenues of the TSPs grew rapidly i.e in some cases the gross revenues rose from INR60 thousand Crores to about INR 100 thousand crores. So year on year the TSPs earned handsomely - and if they meant what they had bargained for, were obliged to pay the agreed revenue share to the Government on basis of the agreed terms. Remember, some even secured fresh licenses on the same terms!

But, year on year, the TSPs joyfully avoided payments and instead disputed the computations of their liabilities. In fact, to make matters woolly for themselves, their shareholders, creditors and the Government, one tiger TSP analyzed by us even avoided recognizing the existence of potential liabilities which were rapidly accumulating with accumulating disputes year on year, as an amount for which it needed to make provisions from the gross revenues earned, so that in case the liability does become payable, it uses the provisioned amounts to meet their obligations.

In fact, the recklessness is amazingly noticeable in the tiger’s contentions that on one hand it insisted that the demands could be only worked out only after the Hon’ble Supreme Court decides the disputes and on the other hand it didn’t recognize the liabilities for maintaining provisions. The rap by the Supreme Court is telling enough:

“189…..The conduct of the licensees was highly unfair, and anyhow and somehow, they had attempted to delay the payment. It passes comprehension how they have contended that the demand has to be worked out after this Court renders its decision. Demand had been raised way-back in the year 2003, which is ultimately the subject matter of the lis. As the objections are baseless and wholly untenable, it cannot be said that there was a bona fide dispute concerning various items. The disputes raised could not be termed to be bona fide at all.”

The cows ...tigers had to come home one day. On October 24, they have!

The provisions set out in the Indian Accounting Standards 37 make it obligatory on companies to recognize a present obligation, legal or constructive, arising out of a past event to make a provision in their books to cover such an obligation in future.

The test laid down is if there is more than 0.5 probability of such an obligation, provision must be made for the same. It is also necessary that a reliable estimate of such estimate can be made. Was the probability more the 0.5? Was it possible to estimate the obligations by the TSPs? Going by the assessment of the conduct of the TSPs, the answer appears more in the affirmative.

Are the pending liabilities arising out of actual gross turn-overs: Yes

If liability was disputes, was the corresponding amount from the gross turnover parked aside as part/full provision pending resolution of disputes: No

Were the said corresponding amounts converted into business assets/ventures by the TSPs: Yes

For the period between financial year 2010-11 to 2018-19, TSPs achieved approximate gross revenues of Rs.733600 Crores, on which the licence fees and spectrum charges would come to approximately Rs.90,000 Crores.

In fact the latest balance sheet for the financial year 2018-2019 of the tiger under analysis shows it was maintaining a miniscule provision of about Rs.2050 Crores towards DoT dues till December 2018 and thereafter downgraded and reversed even that by shifting the obligations from being recognized as an obligation for provision to an un-provisioned contingent liability, based on external opinion.

Annual-Report

Page No.214 of Annual Report for Financial year 2018-19

Annual-Report-Financial

Page No.223 of Annual Report for Financial year 2018-19

Now, just to get out of trouble and unmindful of their legal obligation, the tiger and another transnational compatriot have approached the Government to give them a safe passage out of the predicament. They now find themselves in as a result of their actions over many years of diverting funds form the purposes of AGR (which has now been held by the Hon’ble Supreme Court, to be payable to the Government) to meander into businesses and ventures across geographies and verticals including DTH, Value Added Services, Towers/Infra, overseas telecom ventures etc.

The decision of the Government to constitute a Committee of Secretaries is well within its rights to review the policy frameworks concerning the telecom sector.

But government would be on a slippery wicket if it were to try and review much less reinterpret the findings and implementation of the Supreme Court decision.

Any retrospective waiver of dues of the TSPs to the Government would not only violate the October 24, 2019 Order of the Hon’ble Supreme Court, but will also be contrary to rule of law.

Not only do the TSPs continue to own the very assets/businesses they created using the funds meant to be paid to the Government, the market values of such business assets/ventures as also the market values of promoters holdings are more than enough to cover the dues payable by them to the Government. Additionally, the robust insolvency regime in place now is capable of ensuring that businesses find their way to capable managements having respect for rule of law. The good boys have a statutory right and deserve a level playing field. Hence, the Government may be well advised to take all actions necessary to ensure that amounts kept away by TSPs be recovered instead of rewarding diversions of funds with any amnesty or safe passage.

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